Reddit Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 14 speakers on the call.

Operator

Good afternoon. My name is Julianne and I will be your conference operator today.

Speaker 1

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 Thank you. I would now like to turn the call over to Jesse Rose, Head of Investor Relations. You may now begin.

Speaker 1

Great.

Speaker 2

Thanks, Julian. Good afternoon, everyone. Welcome to Reddit's Q1 2024 earnings conference call. Joining me today to share our results are Steve Huffman, Reddit's Co Founder and CEO Jen Wang, Reddit's COO and Drew Valero, Reddit's CFO. Their remarks will be followed by a Q and A session.

Speaker 2

We issued our Q1 letter to shareholders earlier today and have made it available on our Investor Relations website and our Investor Relations subreddit, 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.

Speaker 2

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.

Speaker 2

Now, I'll turn the call over to Steve.

Speaker 3

Thanks, Jesse. Hi, everyone. I'm Steve, Red'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.

Speaker 3

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 a dream of mine. Starting today and going forward, we want to include the community in this process.

Speaker 3

Our current plan will be to answer a few of their questions on this call, and then we'll do a few more on our DDT 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 1, but 8 practice earnings calls over the last 2 years, very much appreciated. Thank you. We're happy with our progress this quarter.

Speaker 3

More people are visiting Reddit than ever before. Users grew 37% year over year in the Q1. We averaged over 80,000,000 users daily and 300,000,000 users weekly, and we grew across logged in, logged out, and within the U. S. And abroad.

Speaker 3

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, Shredit, is up to 100% of users and it's more than twice as fast as the platform it replaces. B equals retention, retention equals growth. We also recently updated our native apps with instant comment loading.

Speaker 3

Comments and conversation are 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.

Speaker 3

And to grow outside the U. S, 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.

Speaker 3

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, 3rd party developers will be able to push the boundaries of what a subreddit can be and we're excited with the early progress here. For example, WallStreetBets has live stock tickers for trending stocks and a number of sports subreddits have built live scoreboards to track game. Historically, the value of Reddit to our users has been in conversation about recent topics.

Speaker 3

But with improvements to on platform search, we can unlock the huge amount of latent value in all of our past content, including all of 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.

Speaker 3

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. We have nearly 2 decades of authentic conversation, unique perspectives, earnest advice, honest reviews, and answers to 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's 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 Reddit's data ends up and what it's used for.

Speaker 3

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.

Speaker 1

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 Reddit's future as a public company. Reddit is still early in its monetization journey.

Speaker 1

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 interest based advertising. And every day, we are working to improve our advertiser solution and bring new advertisers to the platform. In the Q1, we successfully scaled and diversified our business, expanded partnerships and executed on our ads platform roadmap. Total revenue growth accelerated in the Q1 and grew by 48% year over year to $243,000,000 the fastest year over year growth since Q1 2022.

Speaker 1

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.

Speaker 1

Advertising revenue grew 39% year over year to $223,000,000 the 3rd consecutive quarter of accelerating growth year over year. Other revenue grew over 4 50 percent year over year to $20,000,000 primarily driven by new data licensing agreements we signed in the Q1. I'll first discuss our ad revenue drivers. Our investments enabled us to drive performance for advertisers. Click volumes doubled and we improved click through rates by over 40% year over year in the quarter.

Speaker 1

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 scaled business, mid market and SMB, grew at a faster pace than total revenue.

Speaker 1

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 ads revenue today.

Speaker 1

In terms of geographies, international revenue increased 30% year over year to $43,000,000,000 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 are focused on a few key pillars. Number 1, improving usability for our advertisers and productivity of our sales force.

Speaker 1

Number 2, driving full funnel performance of our ad solutions. And number 3, offering our advertisers Reddit unique solutions and creatives 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 serving small businesses. We're using advancements in AI to remove friction and reduce setup time. We launched an AI driven headline generator for Simple Create, which is mainly a self serve creation flow for small businesses, and we are seeing promising early activation and adoption rates.

Speaker 1

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 CAPI late last year, and this quarter we announced integrations with Telium, a leading customer data platform and Google Tag Manager. We continue to innovate with our ads products to bring our advertisers closer to our communities. We launched Freeform ads, which provides advertisers with a versatile and creative format to drive deeper engagement with users. Testing has shown that preformatted ads 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.

Speaker 1

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

Speaker 3

for the future of shopping on Reddit.

Speaker 1

Users come to Reddit during their purchasing journey and value the rich, human powered product and review discussions on our platform. We launched our 1st 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.

Speaker 1

In the Q1, 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 Zhu shortly on. 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 Q1 as a public company and remain focused on executing and fulfilling our mission. I hope you share the same excitement that we have in Redit's future and look forward to the journey ahead.

Speaker 1

Now, I'll turn the call over to Drew.

Speaker 4

Thank you, Jen, and good afternoon, everyone. As we often say, Red Hat has a powerful financial model that's straightforward, advantaged and scalable. The power of the financial model is evident in the Q1 and we reached an important inflection point. In the Q1, 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 5 times as fast as total adjusted costs.

Speaker 4

In the quarter, revenues grew 48% year over year and total adjusted costs grew 9% year over year. Let's summarize the highlights. DAUQ averaged $82,700,000 up 37 percent 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 9,600,000 users in the quarter, our largest increase in 3 years, with 60% with over 60% of those users being logged out.

Speaker 4

Revenues were $243,000,000 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 $20,000,000 in the quarter, up 4 54% from last year. International revenues were $43,000,000 up 30% year over year and 18% of total revenue. Reddit's business model has couple of distinct advantages, which really shined in the quarter in 2 areas. First, our gross margins remained best in class.

Speaker 4

Gross margins were 88.6% in the 1st quarter, up 500 basis points versus last year, driven by high margin revenue gains, lower hosting contract prices, tech stack efficiencies and the accretive margin tailwind for the new data licensing deals. 2nd, our CapEx remains very light. CapEx was about $3,000,000 in the Q1 and just over 1% of revenue. Low CapEx was a contributing factor to our positive free cash flow that was $29,000,000 in the quarter. As we scaled our business, we saw great operating leverage in 2 areas.

Speaker 4

1st was leverage in operating expenses and headcount. Non GAAP operating expenses were up 10% year over year as we continued 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. 2nd was operating leverage on incremental sales. In Q1, revenue increased approximately $79,000,000 year over year and adjusted EBITDA increased about $60,000,000 year over year, implying that over $0.75 on the incremental sales dollar reached the bottom line in the Q1.

Speaker 4

These highly profitable incremental revenue dollars really help drive positive free cash flow and swing our business into profitability on an adjusted EBITDA basis. That said, we did have a GAAP net loss of $575,000,000 in Q1, driven by stock based compensation and related taxes from the IPO. Stock based compensation including related taxes for the quarter was $595,000,000 up from $13,000,000 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 $10,000,000 in the Q1, nearly a $60,000,000 improvement from the Q1 of the prior year. This marks our 1st profitable Q1 on an adjusted EBITDA basis, which in digital advertising is traditionally the slowest quarter of the year.

Speaker 4

Positive adjusted EBITDA was a strong driver of cash flow for the quarter. Cash from operating activities was $32,000,000 in the 1st quarter, driven by improved performance and working capital improvements in DSO and DPO. A couple of other quick financial notes of interest on cash and shares. At the end of the Q1, cash and marketable securities ended at $1,670,000,000 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 1,200,000 shares to employees in Q1.

Speaker 4

We view stock as a cost of our business and plan to manage dilution to be in line with peers in the low single digit percentage range over time. As we look ahead, we'll share our internal thoughts on revenue and adjusted EBITDA for the 2nd quarter, which is where we have the greatest visibility. In the Q2 of 2024, we estimate revenue to be in the range of 240 dollars to $255,000,000 and adjusted EBITDA to be in the range of $0,000,000 to 15,000,000 dollars So in summary, Q1 was a strong start to the year with accelerated user 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.

Speaker 3

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. So, 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.

Speaker 3

We need to be very considerate of where our data goes and what it's being used for. 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 into looking into both. But that said, not all players in ecosystem, I think, are good fits for Reddit. We're in early days here.

Speaker 3

I'd say big picture, we have seen an increase in interest in Reddit's data for various uses. And so we'll see look forward to how this grows looking forward. Okay. 2nd question, Jen, I think this one's for you. Can you go into specifics about what types of advertising are most responsible for the strong increase in earnings?

Speaker 3

Is it mostly increased sales on previously existing types of advertising or new types of advertising on the platform?

Speaker 1

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 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.

Speaker 1

Brands 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, I'd say, is doing really well because we have made those improvements in CTR, 40% year over year, double in 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 in Continental Europe. And then we have strengthened verticals like finance, pharma, CPG and tech return to growth.

Speaker 1

On the supply side, while designing new ad placements is an opportunity, our inventory today really consists of 2 core ad types. It's the ad in the feed and the ad in the conversations or the comments 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.

Speaker 2

Great. Thanks, Jen. Julianne, why don't we open up the line to take some questions from folks on the line?

Speaker 1

Certainly. Our first question will come from Ron Josey from Citi. Please go ahead. Your line is open.

Speaker 5

Great. Thanks. Thanks for the question. Steve, Jen, Drew, great quarter. I wanted to ask Steve on global DAUQ is growing by $9,600,000 sequentially.

Speaker 5

Just talk about the drivers here and the sustainability. Steve, I know you mentioned Shred is now fully rolled out, improved search is doing better and home feed ML, but any insights on the sustainability of just the user growth would be helpful. And then Jen and Drew, I think the comment was the ad market is healthy, but would love to hear your thoughts as we get into the back half of the year, certainly tougher comps as well. Thank you.

Speaker 3

Sure. Sure. Thanks. So user growth, like we're happy with the results. The main driver of growth is the product is better.

Speaker 3

And so, yes, we mentioned Shredit, Performance both equals retention per users. Web performance also has been driving an increase in traffic from Google, which is driving the increase in largely in the logged out users. But logged in users, which is the core of our business, the bedrock of our inventory, is also up 27% year over year. And the growth there is really driven by improvements to product quality. So sign up has gotten much more efficient, onboarding has gotten better, and then home feed relevance.

Speaker 3

So users finding content that's relevant to them in their first sessions on Reddit, we've gotten much more effective at that. We feel confident looking forward because the growth that we've seen isn't a it's not like a one time spike. We've been adding users very consistently for the last year, roughly 2,000,000 users a month or 7 of the last 10 months and 1,000,000 users in 8 of the 10 last months. And so we long story short, our work is working of focusing on product performance and quality and that's driving retention. I'd say the other thing we're looking forward to as we go forward is international growth.

Speaker 3

We're still fifty-fifty U. S. Versus non U. S, but our peers are more 80% to 90% non U. S.

Speaker 3

So I think there's a huge opportunity there. I think one of the big unlocks for us in the near to medium term is machine translation. So we're translating our entire corpus that's today mostly in English into other languages and hope that that will help accelerate international growth. Jen, Drew, do you want to comment on the second half of the year outlook?

Speaker 1

Yes. I'll kick it off and then talk to Drew. Look, the head market is healthy. Brand advertising is as strong as it's been since 2022. We're feeling good.

Speaker 1

Many parts of our business are working well in Q1 and the first half and are well positioned for the second half. So our strategies are gaining traction. In ads, I like the vertical diversification. We like the accelerated growth in the mid market channel and both in North America and in Continental Europe. So a lot of positive traction.

Speaker 1

The reality is Q1 just had an easier comp, the 12% year over year growth from Q1 2023. We do have low visibility into the second half. And 80% of our revenue is in the U. S. And there is a U.

Speaker 1

S. Election, which could impact how advertisers flight campaigns, especially brand advertisers. And there's also inflation, geopolitical context and some type of comps in Q3, Q4. But we feel like we've had a really solid start. Our strategy is gaining traction.

Speaker 1

We feel good, but we just have low visibility into the back end of the year. Let me pass to Drew to add some more color.

Speaker 4

Yes. No, I think that's well said, Jen. I think that it was a good quarter from us for us, Ron, start to finish. Even March was very strong. I think, as Jen mentioned, the comps in the Q1

Speaker 6

are a little lower than

Speaker 4

the back half of the year there in the 20s. We also may have picked up some momentum from the IPO. Hard to say that to identify that, but we did sort of, as I said, see strength in March. And look, on the cost side of things, I think we found a good rhythm right now. I think in the last four quarters, total adjusted costs have been up 5% to 15%, kind of average 9%.

Speaker 4

Think we're really at a place where we have good scale as a company and we're adding resources where it makes sense. I talked about adding resources in our machine learning teams and in our sales teams. I think we're at a place where we have scale and we're adding selectively. As you know, headcount is by far and away the biggest part of our cost driver. OpEx is 85% of total costs here, total adjusted costs here at the company.

Speaker 4

So I think we feel good at least for the next couple of quarters on how we're thinking about things, but we'll see how it plays out and I echo Jen sentiments on the headwinds and tailwinds on the back half of the year and the things that we're watching.

Speaker 1

Our next

Speaker 7

Steve, one for Drew. Steve, you highlighted the large opportunity in on platform search. Can you just talk about what excites you here for both users and with advertisers? And then Drew, if you could just follow-up on those comments a little bit more on the investment philosophy this year and you pulled back a lot in 'twenty three. We're obviously seeing big incrementals in 1Q.

Speaker 7

Just how do we think about that 5x spread between revenue growth and cost growth as you go through the course of the year and beyond? Thank you.

Speaker 3

Sure. Thanks. So first question is on platform search. So, like a ton of our users run searches in their first session on Reddit. And so when I talk about, you know, one of the biggest challenges and opportunities we face being helping users find their home on Reddit, many of them are typing into a box exactly what they're interested in.

Speaker 3

And so I think just from a user experience point of view, on platform search on Reddit being great is a huge opportunity. Now today we do over a 1,000,000,000 queries per month on Reddit, but I think there's an opportunity for quite a bit more. We've been investing in our search back end. Some quality of life features like bell check and autocomplete are coming online as we speak. We've got some, I think very sensible and overdue improvements to the user interface coming up this year as well.

Speaker 3

And then as the search product itself gets better, of course, then there's an opportunity to monetize those pages. So there are no ads today on search result pages, but that's obviously a very high performing product elsewhere on the Internet. And I think there's no reason to believe that it wouldn't be for Reddit as well because the intention is so explicit when users are searching. So, first step, improve the product for users. And then, I think when we feel like we're in have a good foundation there, we'll start looking at monetization.

Speaker 3

Drew, I think the next question was investment philosophy.

Speaker 4

Yes, investment philosophy. Doug, thanks for the question. Look, in terms of the investment philosophy, it didn't change here. What your point about revenue 5 times as fast as cost, yes, nice to see for sure. It really was about the revenue line or the numerator expanding.

Speaker 4

Last three quarters, we've averaged about 23% revenue growth, this quarter 48%. If I look at our total adjusted cost growth last 4 quarters has been 9%. This quarter was 9 percent. So the investments in the business stayed the same or consistent with the 4 quarter average. It really happened here as we were able to leverage those resources and really drive a top line that was meaningfully different, double the growth rate over the last 3 quarters.

Speaker 4

So I think that's really what happened in terms of that. I will tell you that's an output metric. We didn't sort of design the quarter to be that way. I think internally long term, Doug, we'd like our revenue growth rate to be twice as fast as our cost growth, like that's how we think about running this business over the long term. But there are certainly quarters where we can do better than that.

Speaker 4

And I think the Q1 was a prime example of that.

Speaker 1

Our next question comes from Brian Nowak from Morgan Stanley. Please go ahead. Your line is open.

Speaker 8

Thanks for taking my questions. I have 2. The first one just on the strong user growth. There any way you can sort of help us unpack a little bit the benefit of the new Google partnership, maybe any quantification of the incremental traffic, what you saw in traffic trends coming out of that from Google? And then I guess to follow-up on that, where are you on sort of the Google SGE integration?

Speaker 8

Should we think of it as there's sort of more queries you're going to be integrated in over the course of a year to make this tailwind grow

Speaker 6

or sort of how does that relationship work?

Speaker 3

Sure, Brian. This is Ivan. So the biggest factor driving user growth is the performance and product quality, because that's what's driving retention. And so retention compounds into growth over time. Yes, we're seeing a tailwind from Google, and you can see that in our logged out numbers.

Speaker 3

But that's not the agreement we have with with Google around, the data training. That has nothing to do with traffic. I think, really, the the most the biggest driver of uptick in traffic from Google is also performance. Googlebot likes speed. It keeps track of the performance of the pages it crawls.

Speaker 3

And we made those pages, in some cases, more than twice as fast, in some cases up to 5 times as fast. And so that has a huge improvement in ranking. We do see algorithm changes from Google. Usually, you can expect maybe 2 a year. But sometimes they help, sometimes they hurt.

Speaker 3

So you'll never hear us celebrating or complaining about those. But you can see the consistency in our growth for the last year, right, over a 1000000 users a month, basically for the last year. And so that's been I think that's been really strong and consistent and speaks to the foundational improvements. And then I think there's a secular trend that benefits Reddit, which is in the AI era, people value authentic content more, right, content written by humans. And that's what Reddit is, and that's what Reddit has.

Speaker 3

And so I think there's a thirst for authentic opinions and advice and commentary and just conversations. And so I think that's the kind of irony of the technology shift that we're going through. It's the value of humans and fresh ideas continues to grow. Now in terms of the Google experiences, how their product impacts Reddit, Look, that's one of the things we're considerate of when we do any sort of deal, which is like how do you display Reddit data and making sure that folks link to us and that sort of thing. And so look, I feel pretty confident in how this will play out.

Speaker 3

Like we've been a beneficiary of Reddit being in search and in Google for a long time. And so I think Reddit being well indexed is good for our respective companies, but most importantly it's good for the end user who gets to find answers to their questions, gets the it brings new users to Reddit, it helps them find their home on Reddit. And so, I think Google getting better and better at displaying our content can only help. And we've seen that play out for over a decade now.

Speaker 1

Our next question comes from Justin Post from Bank of America. Please go ahead. Your line is open.

Speaker 9

Great. I'd like to ask one more about users and then just guidance philosophy. Certainly a good user quarter. Just wondering about retention and churn. Are you seeing more people come at the top of the funnel and that's driving it?

Speaker 9

Yes, I'm talking about logged in, of course. Or are you just seeing less churn or are people coming in more frequently? So, weeklies are coming in daily or is it everything, but maybe a little more color on that. And then Dhruv, maybe on the guidance, since this is your Q1, just tell us a little bit more about your guidance philosophy. Sequential is maybe a little less than last year, maybe it was a really tough comp, but just tell us how you think about guidance that you want to provide each quarter?

Speaker 9

Thank you.

Speaker 3

Sure. So on users, the credit has long had a massive top of funnel. We've been reporting more than 500,000,000 monthly users for quite some time. Now we only update that user that number periodically because we really run the business on dailies and weeklies. But, the way we think about it is we need to improve user retention.

Speaker 3

Like, we're pretty confident that just about every user on the Internet is going to bounce off Reddit periodically, whether it's through search or word-of-mouth or this or that. The challenge to us is can we retain those users. And so that's why our focus has been on quality performance onboarding. And so we've seen really nice improvement to new user retention and user resurrections, and so bringing old users back. And so those are the input metrics that we really look at when we're building new products and those compound in the growth.

Speaker 3

So that's why I keep saying I think what we've done is made improvements to the foundation and we get to mine those improvements for some time as opposed to this is maybe a one time shift or things we had a good quarter. The product is simply better and we're benefiting from that now. Okay. 2nd question, I think Drew was on guidance.

Speaker 4

Right. Justin, high level, we will guide on a quarterly basis. 1 quarter ahead, we will do revenues and we'll do adjusted EBITDA. That's what we're comfortable with at this time. In terms of the Q2 guide, I take your point, we grew 48% in the Q1.

Speaker 4

The midpoint of the guide is mid-30s. So there is a little bit of a decel there. Look, I think as we mentioned, it was a strong quarter for us top to bottom. The month of March was very good for us, as I mentioned. I think we're just looking at the comps a little bit.

Speaker 4

I think that's a little bit driving where we are at this point. The comp was, as Jen mentioned, 12% in the Q1. The comp is 23%. I do think we might have gotten a little bit of tailwind from the IPO in the Q1. We'll see if those tailwinds continue.

Speaker 4

A couple of other things that kind of worked in our favor in the Q1, right? You get an extra day with leap day. Easter was a little bit earlier. Like all things kind of worked a little bit. But overall, as Jen said, it's a good solid start to the year for us and we'll sort of see how we do.

Speaker 4

I think bigger picture, we're keeping our eye on a couple of things, particularly geopolitics. I think that is the one thing that can affect you intra quarter depending on sort of what the geopolitical situation is. Brand advertisers can pull advertising if things aren't where they want it to be from time to time. So those are the that's probably the biggest one we're looking at inflation and elections too. Those are the other couple of things that we take a look at.

Speaker 4

But overall, it was a good quarter, Q1 and we ended with momentum. We'll see how the Q2 plays out, but it really is kind of comp driven and sort of couple of tailwinds that we had in the Q1. We'll see if they continue the second.

Speaker 1

Our next question comes from Eric Sheridan from Goldman Sachs. Please go ahead. Your line is open.

Speaker 10

Thank you so much. Maybe if I could just get a 2 parter for Jen. Jen, when you're now talking to advertisers and thinking about the future of the platform, number 1, which platform initiatives and product initiatives are resonating the most in terms of driving either advertiser count or advertising spend as we get deeper into the 2024 budget cycle? And as you go out and have those conversations, what are still the big asks or friction points you and the team are trying to solve for to bring more advertiser count budget in beyond 2024 on your long term roadmap? Thank you.

Speaker 1

Thanks for the question. I'd say, I think our aspiration to be a leader in contextual and interest based advertising is very differentiated, and it resonates with all of our advertising partners. And the idea that Red Hat can be a full funnel solution, I think is very attractive and we've made good progress against that. I mean, we started at the top of the funnel with brands. I think we have really done a lot of work and delivered a lot of performance and efficiency at the mid part of the funnel with the continuing growth in click through rates and click volume.

Speaker 1

And now with launches like dynamic product ads and we had the catalog ingest last year and the work we're doing in app and phone conversions at the bottom of the funnel, I think advertisers see how serious we are in delivering value at the bottom of the funnel. So this idea of being full funnel and being differentiated in terms of our targeting capabilities, I think, is really resonating. We are focused on laying down signals for the bottom end of the funnel. So you see the work we did with a Google Tag Manager partnership in Telium. We'll look at more of those.

Speaker 1

So CAPI and conversion API incredibly important for signals into the models that we're building at the bottom end of the funnel and just working with advertisers to start testing spend against these solutions and continue to iterate. So I think there's real excitement about, wow, you're doing great in brand and mid funnel and now the lower end of the funnel is potentially going to open up for us to go truly full funnel. That's really, really exciting. So that's what our advertisers are, I think, particularly excited about to just have that additional objective. Our next question comes from Benjamin Black from Deutsche Bank.

Speaker 1

Please go ahead. Your line is open.

Speaker 6

Great. Thank you for the question. Steve, I know you're pretty excited about the development program and how that could be transformative longer term. But more near term, what are some of the investments that you see as necessary to build that out even faster? And could the sort of developer platform have potential positive implications for the ad business as it grows?

Speaker 6

And then the second one, I'm not sure if this is for Drew or for you, Steve, but obviously a big quarter of logged out user growth, but just given the fact that logged in users monetized at a slightly higher rate, can you just sort of help us understand what the strategy is to convert more of the logged out users to logged in? Thank you.

Speaker 3

Thanks for the questions, Ben. So first, developer platform. Yes, I am very excited about it. But I would actually train the developer platform as a as a relative near term opportunity. We've got a couple of 100 developers playing with it now.

Speaker 3

Some

Speaker 2

of their work

Speaker 3

is in production as we speak, so some of the kind of scoreboards and stock tickers and things like that. But we can see in development another level of interactivity. Our goal is to get this fully open so all of the developers off our waitlist and there's 1,000, really, like, call it this summer, and then started getting the monetization features in there later this year. And so I think there's a lot of opportunity there, all hands on deck, trying to bring this to market. So I think the developer platform and the new RedaGold and the user economy kind of dovetail together really nicely later this year.

Speaker 3

In terms of the dynamic between logged out and logged in, yes, the bedrock of our business today is logged in users. And we see plenty of logged out users, particularly from Google. But I don't think from a product point of view, the best strategy for us is to try to convert a logged out user into a logged out logged in user in any particular session. They're usually coming from search. They have a question and we need to give, you know, what they're looking for as an answer, and we want to give them their answer.

Speaker 3

Now, I would look at the total DAU as the think of that as the opportunity down the road. Those are users, those are human beings that are on the Reddit platform, for various reasons. We just know that in any particular session, not everybody is looking to join a community and have a profound experience. Sometimes they just want an answer to their question, and that's okay. The other thing I think that's really important is that we grow our ability to monetize logged out users.

Speaker 3

Most of them are landing on what we call a post detail page or a comment page, which is a very specific page. In many cases, it's talking about a specific product. There is an ad unit on that page, but I'd say we're still in early days there, getting advertiser density so that we can have a well targeted ad on all of those pages. So, I think there's lots of potential in monetizing logged out users. So in summary, I'd look at it, the logout users today represent potential for future logged in users.

Speaker 3

They also represent potential and monetization in their own right as well. But from a product point of view, we focus on the the logout users having a great experience for what they're trying to do. And when a user hits us, you know, opening the app for the first time or coming to our front page, really focusing on giving them a great experience to maximize their retention.

Speaker 1

Our next question comes from Tom Champion from Piper Sandler. Please go ahead. Your line is open.

Speaker 11

Hi, good afternoon. Steve, I'm wondering if you could talk a little bit more about the machine translation tools that you're building and maybe with an eye towards the overseas market. I think the release talks a little bit about French or the French language maybe being somewhat underway. And just curious what you're seeing with the user trends in maybe in France or other French speaking countries? And then maybe for Drew or Jen, Very early days in data licensing and I think we're all very interested in it.

Speaker 11

And just curious the early learnings either financially or the potential with the product. Any thoughts there would be really helpful. Thank you.

Speaker 3

Thanks. Great questions. So the first one on translation. So one of the things I think that's most exciting for us with large language models is the ability to do translation at human level quality. This was just quite simply technology that didn't really exist a year ago, and now we can translate Red Hat's entire corpus into another language.

Speaker 3

And so, French is the first language we're doing this in. It's in testing now, and the results are looking very promising. And so, if you're a user in France, in this test group, you can see all of Reddit, including like big blue chip communities like AskReddit, entirely in French. And so this is leading to, as we would hope, improved retention and time on-site and then growth among these users. And they're also seeing this content get indexed by French language Google.

Speaker 3

And so we start to see new users coming to that content as well. And so I think really promising start here. We're going to do more languages this year As we get the product polished, the next one would be Spanish, which I think represents a pretty big opportunity. So this is very exciting. I think I keep saying everybody has a home on Reddit today.

Speaker 3

That's a true statement if you speak English, but we want to make that a true statement for everyone in the world. I think it's not a matter of if, but when, We want to make that when as fast as possible. And so I think this represents our best shot at dramatically accelerating our growth outside the U. S. In the non English markets.

Speaker 3

Second question was about data licensing for let's start with Jen.

Speaker 1

Thanks, Steve. So on data licensing, Steve mentioned, it's really a barbell business where one part of the business is well established markets, things like social listening, maybe financial markets. In social listening, I think we've learned there's clearly a established market. There's interest in credit data for insights that lead to business decision making, marketing decision making. And it's a new market that I think has potential to grow over time, but it's a lot of players and a lot of players in sort of smaller deals, but established market.

Speaker 1

I'd say another learning is in this barbell side, so take certain verticals like finance, etcetera, which are a little bit outside of our domain. Potentially working with partners who have access to distribution is very interesting to us as we learn those markets. So that's something that we're thinking about. On the other side of the barbell, Shar, fewer deals, fewer partners and probably a handful, but larger are the folks who are AI model builders. And on that side, I'd say, these are mid term deals is how we think about them because it's such a nascent and early market that we want to see how things unfold, so not forever, but long enough to understand value.

Speaker 1

User privacy is very important to us and that's very important in how we craft these partnerships and consider partnerships, making sure that users, when they have edits and deletions are respected is very important to us. I say partners where we're non competitive and where we can grow together, It's not always the case. And so we just want to be sure that the partners are right fit even over the midterm. So those are the things that I think we've learned in the, I'd say, the AI partnerships that we're sort of more selective given all of those pieces.

Speaker 3

Yes,

Speaker 4

let me add 2 things on the financial side, Tom, both positives. I think, as Jen said, in the barbell market, it's been nice to see on the smaller side. There are 7 figure deals available there. And so that's been nice to see the team work hard and get those done. So that's been a benefit for a company like ours.

Speaker 4

And then the other piece is just sort of the cost of putting together the data as we're pulling it, it's a high gross margin business to begin with. This has really been accretive to our business that the cost of preparing the data is probably a little less than we thought it would be, and really flows through quite well in the P and L is one of the keys to success that you see in our Q1 numbers.

Speaker 1

Our next question comes from Richard Greenfield from LightShed Partners. Please go ahead. Your line is open.

Speaker 4

Hi. Thanks for taking the question. I guess I wanted to follow-up Steve on your answer about Google. You really talked about how Google indexing for AI will ultimately be good for Reddit in the long term. But I guess what I love to reconcile or help understand is when consumers are using AI platform, like I

Speaker 3

go on ChatGPT or I

Speaker 4

go on Gemini And when I'm searching for something, I'm sure I'm getting content that I believe is coming from Reddit, but it doesn't say this came from Reddit or this. Like, when I go to Google and do a Google search, I get a very clear set of links that say, these are from Reddit and I clicked in and I go to a Reddit page. That doesn't happen in AI. Will that happen in AI? Is that the future that we see?

Speaker 4

And I'm just trying to understand traffic. Does traffic end up slowing to things like reddit.com and to your app versus these applications where you're making money? How do you see this evolving? Because I think it obviously is impactful to your brand and what your brand means to the consumer.

Speaker 3

Thanks Rich. Good question. Look, when we do these agreements and the ones we have so far are very clear that if you're using Reddit's data in an answer like in your example, you have to link to Reddit, right? You have to say Reddit, you have to use our branding, you have to link to us. And I think that's it's really important to your point.

Speaker 3

We are starting from a position of we would like Reddit to be out there. I think it's good for the consumer. I think it's been good for our platform. We've lived that for a long time in search. And I think of the AI products that we know today as really extensions of search, right?

Speaker 3

Users are typing into a box what they're interested in and getting answers. Now, will people, be able to, take Reddit's data, not send any users to us, take credit for themselves and enrich themselves? Going forward, the answer is no. I think our historical way of handling public data no longer works. In the past, I think crawling Reddit benefited the whole ecosystem, including users on our platform, as we said.

Speaker 3

But increasingly, we are seeing folks who hoard public data and they use it to enrich themselves. And so, we're open minded about having relationships with companies like this and being included in search and used for training, but it will come with guardrails, with agreements that protect our platform and our users. Similarly, in the past, Reddit has been open for research and we want to preserve that. So, I think there are uses of Redis data outside of use outside of Redis that are really important. And I do want to be clear, under no circumstances will we ever license behavioral data or data that is not already public.

Speaker 3

But I think these guardrails are really important. And so, look, we're open and we're open for business, but we're not just going to give it away. And I don't think companies that have taken or continue to take our data can expect to continue to do so with no repercussion.

Speaker 1

Our next question comes from Mark Schmulich from Bernstein. Please go ahead. Your line is open.

Speaker 12

Yes. Hi. Thanks for taking the question. Just a longer term strategy one as we kind of get our first visual of Reddit as a public company. But as you think about all the different efforts that you've kind of shared underway around advertiser diversification, more ad products, the user economy data licensing efforts, Any way to think through dimensionalizing how you're thinking about prioritizing investments across all those monetization initiatives?

Speaker 12

Thanks.

Speaker 3

Yes. Look, I'll start and see if Jen and Drew have anything to add. Our top priority and where most of our resources go is the core of Reddit. And so this is the community and conversation platform, our apps and the website, and then the ads business. I think there's a tremendous amount of potential in this area.

Speaker 3

So, I think we can grow users quite significantly, both in the U. S. And even more so outside the U. S. And we've got a long way to go on that.

Speaker 3

We're very happy with the progress, but really, it still feels like we're at the beginning of our journey. There's just so much upside. And so that's the core of what we do and how we think about the future. And then, kind of our next couple of chapters are, yes, the user economy and developer platform and the search opportunity. So I think of this as like a seventy-twenty-ten model, right, 70% on the core of our business, and then the rest on these future initiatives.

Speaker 3

Now the things for our future initiatives, user economy, developer platform, search, they're pretty down the fairway for Reddit, These I think are very sensible opportunities to expand the platform and to grow our business. And so it's not too far afield. I think all of these things kind of fit together in a nice way. And of course, the other big opportunity, right, the international growth machine translation, I put that in the core, but it has a tremendous amount of upside itself. Jen, Drew, what would you add?

Speaker 4

From here, Steve, I would just add that the margin profile of the business just really encourages investment. We have so many things that I think sort of lead us to want to invest in this business at least in we think of our business as a 3 legged stool, right, in terms of ad revenues and licensing revenues and then kind of the user economy piece, but at least in the first two. I mean, you've got a great collection of high margin, immediate payback, no capital. Like that's where the ad business is and that's where we're finding the licensing business here. The investments are really headcount driven.

Speaker 4

And so those are just easy businesses to track. It's easy to see from an accountability perspective what you're progressing here. But the high gross margins give you a good chance for the payback. The immediate term, you can course correct if you need to. It really does sort of set yourself up to really look for the right investments and accelerate the revenue growth rate.

Speaker 4

That's how we think about things sort of conceptually. Now this 3rd leg of the stool as it relates to the developed platform, the user economy, that's coming together now. And so we'll see what that ends up being. Right now, we're doing kind of more product market fit work. But overall, the dynamic of the first two pieces of business, Steve, I think are just really unique and special in the sense that they're short term, high margin, no capital.

Speaker 4

Those are really financially easy places to invest where you can see your payback quickly and course correct if you need to.

Speaker 1

Our last question today will come from Andrew Boone from JMP Securities. Please go ahead. Your line is open.

Speaker 13

Thanks much for taking my questions. 2, please. The first for Jen. You talked earlier about scaling the business and adding diversity as a key area of focus. Can you just talk about your progress here, especially given the strength that you saw in SMBs this last quarter?

Speaker 13

I think there was 50% growth in the skilled business area. And then Steve, a bigger picture question, video is one of the key trends across in app time spent at large. Can you talk about how you think about video and how you're incorporating video onto the platform? Thanks so much.

Speaker 1

This is the first piece. We are diversifying on multiple fronts. Number 1, in terms of geography, growing our monthly active advertisers outside of U. S. Number 2, in terms of advertiser size.

Speaker 1

So the scale channel, which is mid market advertisers and SMBs, we saw strengthen in Q1 in an area of investment for us. What I like about those advertisers is they really start at the mid funnel and they tend to be more performance oriented. And I think they're benefiting from some of the performance improvements we've made in the platform. And there are just 1,000 more advertisers in that segment that can be on Reddit. So that is something we continue to work against.

Speaker 1

We are adding and growing our monthly active advertiser accounts in that segment. That's a focus for us as well. And then verticals. Verticals is something over the last 12 to 18 months we've expanded into and continue to have a lot of opportunity. In our large customer segment, while we touch top 300 advertisers, a lot of these have multiple business lines and were only penetrated in a handful.

Speaker 1

And so there's just a lot more opportunity in sub brands and sub businesses. Even in that segment as we grow out the different verticals. And we see segments like finance and pharma and CPG growing 50% year over year. It just is a signal that there's just a lot of opportunity there. So it's a priority for us.

Speaker 1

We are growing at monthly active advertisers. And I think that scale segment in particular, there's just thousands more advertisers that can do our platform.

Speaker 3

Okay. And as for video, yes, as you say, video is obviously huge, important content type on the Internet. I'd say the way we think about that Reddit, like Reddit is no different for Wadsworth. Video is one of our fastest growing content types. More and more people spend more and more time on video on Reddit.

Speaker 3

But I do, I think from a product point of view, try to think of Reddit as being content type agnostic. That is, whatever type of content that users want to use to communicate or tell stories, they should be able to do so on Reddit. And so, look, we've put a ton of effort into in the last year of just the quality of our video player, making going in and out of video from our feed, making the just the day to day experience of watching video on Reddit better. And we've got some nice updates coming even in the near future towards that end. But look, images, static images, and text are also hugely important to Reddit.

Speaker 3

And so a lot of our effort is how do we bring these things together in harmony. And so I'd say the core Reddit product is parts of it are still under construction right now, making a mixed media feed work really well where text and links can hold their own alongside video and GIFs and ads, that's been really important to us. I think we've made some progress, but I also think there's plenty of room for improvement there. So, we're going to my answer is similar to my answer on search. I think we'll make the video playing and creation experience on Reddit better.

Speaker 3

And when the product is really performing well, then I think we can start talking about monetization. Obviously, it's a huge monetization potential on Reddit. So we'll get there before long, but our focus right now is on making the consumption and creation experience better. I think there's plenty of room for improvement. Okay.

Speaker 3

I think we're at the top of the hour here folks. Thank you so much for your time and attention. It's really exciting to be here I think for our first public earnings calls. But the folks who've been with us helping us do this for so long, again, we're so grateful. And we will talk again soon.

Speaker 3

Thanks, folks. Bye.

Speaker 1

This concludes Reddit's Q1 2024 earnings call. You may now disconnect.

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Earnings Conference Call
Reddit Q1 2024
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