Reddit NYSE: RDDT reported third-quarter revenue growth of 53% year over year to $895 million, as advertising revenue rose 54% to $847 million. The company also said trailing 12-month revenue surpassed $3 billion, while profitability and cash generation continued to expand.
However, executives said changes in internet search are reducing referral traffic to Reddit, particularly among logged-out web users. Chief Executive Officer Steve Huffman said the decline accelerated late in the third quarter and has continued into October, prompting the company to focus more heavily on logged-in and app-based users.
Search Traffic Declines, but App and Logged-In Users Grow
Huffman said search-referral traffic was down “meaningfully” during the third quarter, with the largest effect on logged-out and web traffic. The company attributed the trend primarily to the expansion of AI Overviews and AI Mode in Google Search, which Huffman said are not traffic drivers to external websites.
During October, Reddit saw search traffic fall by more than 1 million referrals per week on average, Huffman said. If that pace persists, he said current trends indicate total daily active uniques, or DAUq, could fall by a low double-digit percentage in the fourth quarter from the company’s current base of 130 million DAUq.
Still, Huffman emphasized that logged-in and app users grew sequentially. Those users account for the majority of engagement and more than 80% of monetization on Reddit, according to the company.
“Search referral trends do not determine our relevancy, and they do not define our future,” Huffman said.
Reddit is responding by investing in product improvements, marketing and user conversion. The company said first-week retention among new users installing the Reddit app rose by a double-digit percentage sequentially and more than 50% year over year. Video creation, video consumption and chained video views also increased.
Huffman said Reddit intends to make its feed more organized so users can more reliably find experiences such as news, trending content, videos, games and favorite communities. The company also plans to expand app conversion efforts among search-referred mobile-web users; only about 13% of eligible mobile-web users currently see an app conversion prompt, he said.
Logged-In-Only Test Planned
Reddit plans to begin testing a primarily logged-in experience in select markets outside the U.S. during the fourth quarter. The company said the test will help determine which portions of Reddit remain available to users who are not signed in and where login prompts should appear.
Huffman said the change is intended to improve personalization and engagement, provide more advertising-targeting signals, better protect Reddit’s data corpus and help the company adapt to emerging regulations. He said Reddit expects to make the transition, although the tests will determine its specific implementation.
“There will be trade-offs here. We’ll likely be trading reach for engagement,” Huffman said. “But when a user logs into Reddit, they engage much more deeply.”
The CEO said the change would make Reddit harder to scrape, though not impossible. He added that the company remains in active discussions about content licensing but said any agreement must support Reddit’s long-term strategy and provide a fair exchange of value.
Advertising Demand and Product Adoption
Chief Operating Officer Jen Wong said advertising growth was driven by both pricing and impressions, with pricing outpacing impression growth. Click volume increased more than 50% year over year, while conversion volume more than tripled.
Revenue growth was broad-based across channels, industries and regions. Scaled revenue grew more than 80% year over year, while active mid-market advertisers increased by more than 50%. U.S. advertising revenue rose 51%, and international advertising revenue increased 68%.
Lower-funnel performance products led demand, with shopping and app-install objectives each growing more than 95% year over year. Video-views revenue more than doubled, Wong said.
Reddit Max, the company’s automated campaign product, entered public beta in the quarter. Advertiser adoption of Max more than tripled sequentially, according to Wong. Reddit also expanded shopping campaigns to support up to 20 million products and said revenue from its Ads API ecosystem grew more than 45% sequentially.
Wong said the company is shifting a portion of U.S. paid user marketing from web-reach campaigns toward app-install campaigns. Reddit’s early results indicate users acquired through U.S. app-install marketing are retaining at rates comparable to organic app users, she said. Internationally, the company increased web-focused user marketing spending to offset lost search-referral reach in markets where Reddit has lower brand awareness.
Profitability, Cash Flow and Outlook
Chief Financial Officer Drew Vollero said third-quarter net income was $283 million, or $1.40 per diluted share, compared with $163 million, or $0.80 per diluted share, a year earlier. Adjusted EBITDA surpassed $1 billion year to date and grew more than 70% year over year in the quarter.
- Adjusted EBITDA margin was 45%.
- Net income margin was 32%.
- Gross margin was 91.5%.
- Free cash flow totaled $363 million, up 98% year over year.
- Free cash flow margin was 41%.
- Cash, cash equivalents and marketable securities totaled $3.03 billion at quarter-end.
Average revenue per unique user increased 36% year over year to $6.87. Total adjusted costs and expenses rose 41% to $493 million, while headcount increased 3% sequentially and 12% year over year.
Reddit repurchased about $100 million of stock during the quarter at an average price slightly below $150 per share. The company had approximately $660 million remaining under its current repurchase authorization.
For the fourth quarter, Reddit projected revenue of $1 billion to $1.03 billion, representing 38% to 42% year-over-year growth. It forecast adjusted EBITDA of $480 million to $510 million, implying an adjusted EBITDA margin of about 49% at the midpoint.
Vollero said Reddit’s next internal revenue milestone is $5 billion, following its recent addition to the S&P 500 and the company’s passage of $3 billion in trailing 12-month revenue.
About Reddit (NYSE:RDDT)
Reddit, Inc operates a global online platform where users participate in communities organized around shared interests, topics and activities. Members can submit text posts, links, images and videos, as well as comment on and vote on content. The platform includes thousands of communities, commonly known as subreddits, covering subjects such as news, entertainment, technology, sports, finance and lifestyle.
Reddit generates revenue primarily through digital advertising, offering advertisers access to audiences based on community interests and user engagement.
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