Reddit, Inc. (RDDT) Earnings Call Transcript & Summary

So what's most valuable to Reddit is bringing users into the Reddit ecosystem, right? We want to grow our direct user base. That's where our business lives. So the Reddit business that's been growing over 60% for the last 2 years, that largely exists in our app and our core user base. So anything that helps grow that ecosystem is really important. But then traffic that's logged out or transient is just less meaningful to us, which is why we can see volatility in SEO traffic, and that doesn't turn into volatility in our business. It's because the 2 just aren't really that connected. But within those logged-out users are lots of opportunity for core Reddit users. So that conversion has been really important to us. So converting those mobile web users into app users, we've been doing a lot of that in the last quarter. And that's part of the reason we're able to drive new user retention so much in the last quarter, is we're converting these users, who are basically already Reddit users, into the app. On the data side, right, it's a different conversation. That's a -- so Reddit's data is used -- has been used to create every AI model that you've heard of, some with our permission and some without. And so the value of that data is tremendous. And I don't think anybody is debating this at this point. And furthermore, the companies aren't even denying having used Reddit data at this point. It used to be maybe an open secret, now it's just open. For us, I think whether these relationships are formalized or not, Reddit wins because we have the data. We have the content that the models want. We have the content that the Internet consumer wants. And we will productize it and expose it in a way that is most accretive to Reddit. So that could be through partnerships, which we've done so far, and it can also be building our own products around search and shopping and all of these other behaviors that I think are important. So I think either way, Reddit is in a great place because we have the fundamental thing that people want, which is the knowledge and perspective that comes from other people.

Okay. Anchoring around what you talked about earlier with the uniqueness of content on the platform, one of the most important aspects of the company is the moderator community in fostering and growing that unique content. What's the current health of the moderator community and Reddit's relationship with mods today?

So moderators, when we say moderators, it's different than other platforms. Moderators are not employees of Reddit. Moderators are the users who create communities. And they're the lifeblood of Reddit, right? Reddit is communities, and these are the people who create the communities. They write the rules, they're the stewards of the culture of these communities. So our relationship with mods is good and deepening. So there's lots of different touch points here. But the moderators are involved in every aspect of Reddit. And I talk to them a lot, about the things we're building, the things they need, where we're falling short. We get a lot of feedback from them. One of the things -- the evolutions I want to go through, that we're in the middle of, is the moderators basically have the ability to remove content from subreddits. So this is how, for example, a community I mentioned, the GirlDinnerDiaries one, communities like that, where when you go read every post and every post is in the same structure and tell stories in the same way, that doesn't happen on accident. The mods are doing real work there to reveal that. So we want to help mods be more effective at that and evolve them from having to be the bad cops all the time. So this is another area where AI is really exciting, where LLMs can be really helpful, which is enforcing the community rules at scale. So instead of the mods having to do that, the mods can write the rules, they can set the tone, but we can let the computers do the dirty work. And then mods can be the good cops, right? They can be the stewards of culture. They can do the things that bring users in. They can feel really great about growing their communities. And so I think that evolution is something we're very excited about, is helping AI do the day-to-day stuff and with mods being the guiders of that, and let the mods do the more fun work and really create and deepen these community experiences.

So sticking with that theme and maybe playing it out over multiple years, what do you think the number 1 or 2 things you'd like to build from a product standpoint that would help moderators more generally and continue to grow the community and continue to scale sort of the satisfaction of folks who want to play that role as moderator?

So there's 2 things. So the first is what I was just touching on. Helping mods, this is something where we have out now and are iterating on it, called the Rules Hub. So letting the mods write the rules, and then you can see how those rules would impact your community. So you can get the rules really dialed in so that you bring into your community the exact users and content that you like and you can keep the rest out. An important part of communities, just for what it's worth, is the boundary, right? If there's not a boundary, like outside and inside, nonmember, member, that sense of belonging, there's no community. So the boundary is really important. And so the mods maintain that boundary, but AI can help them be much more effective at that. The second thing we're doing is in the feeds. The feed is the primary way new communities are discovered, right? The feed is how we help the user find the communities they may love. And so when done well, you can grow a community with community members that contribute and make the community better and better. If done poorly, you send a firehose of users every which way and the community experience actually gets diluted. So that triage, that matchmaking process, that's the job of the feed. And I think we can do a -- continue to do a better job at that. The example I keep using today, GirlDinnerDiaries, I think is a really good example, right? It's a small community of people who contribute to it, but the reading audience is vast. And so helping it get discovered but also keeping it safe and protected, that's the double duty that we do on the feeds. So we can help mods be better mods and we can help mods grow communities in a healthier way.

Okay. That's really helpful. If you look at the balance sheet for Reddit, you've got $2.8 billion of cash on the balance sheet as of the last quarter. And estimates of the sell side would have you generating over $1 billion of free cash flow this year. How do we think about capital allocation for the business? What are your priorities, especially when you think about the balance sheet you have relative to optimizing for returns?

So like Reddit as a business is 1 of 1 in our ability to generate cash, especially at our scale. So we have 3 priorities. The first is invest in the business. So this is quite simply people and compute. So hiring people to build the products that we want to build and getting the compute to run the engine. The second is M&A. So we're getting more active in this space, just finding other companies that can accelerate our roadmap, bringing great tech into the company, great -- bringing great teams into the company. And third and finally is share repurchase. And so we've done, I think, $250 million this year, probably on track for about $500 million. And so there's opportunities for us right now to continue doing that. And so we'll do all 3. But it's really invest in the business, look at M&A and share repurchase.

Maybe just to parse out 2 of those. With investing in the business, what are the 2 or 3 things you're the most excited about allocating capital to that can grow the business over the next 3 to 5 years?

It's the core product. It's the core product first. So this is -- I say it in one word, feeds, but there's so much behind that. So it's the engine, that recommendation engine that powers the feed, that powers push notifs, that powers e-mails. But it's also really onboarding, right? It's bringing new users into the right place on Reddit. It's navigation. It's helping core users like me find where they're going in Reddit. So that's a big investment of ours. I think we said we're probably a year behind the state-of-the-art -- a year to 18 months behind the state-of-the-art for feeds. And so I think there's a lot of opportunity there. So that's people and compute. Other areas are search, are video, is shopping. Because we think of Reddit as our work is like horizontal, so what is the infrastructure that makes all of Reddit better. So this is like the recommendation system, this will be like the video platform, this is the search system. And then the vertical slices through that. What are the specific use cases that each community can use to build on top of those things? And so we're doing both right now. There's -- Reddit, it's like -- it looks like a simple feed of posts, but it almost behaves like a super-app. There's so many different use cases in Reddit. There's so many opportunities to productize every single vertical, right? I'm a game player, I'm a video game user. I'm a TV watcher, I'm a sports watcher, I love reality TV. I'm a parent. There's all these different -- I'm shopping for something. So revealing each of those use cases really intentionally is the other set of work that we do.

Okay. And then just a follow-up on your answer around M&A, I just want to make sure I understood the clarifying point. It seems like there's the ability to either buy versus build, and M&A could be a lever that could accelerate product capabilities, talent in the organization. Is that the way you kind of think about it, as opposed to like scale? There tends to be 2 types of M&A. Yes.

Yes, exactly. For us, it's team and technology first, as opposed to expanding our land. So we've had a lot of success, particularly on the ad side, bringing in technology that's accelerated our roadmap, bringing in experts. One of the best ways to bring in the top, top talent is through acquisition. For us, I think down the road, there will be opportunities to expand Reddit's user base through M&A. But today, the best way to grow users is to improve our product and technology because we have so many new users trying out Reddit every day, right? Hundreds of thousands of people every day downloading the app for the first time, who are curious about Reddit. That's a massive opportunity. And meeting their needs, that will drive the growth that fuels our business in the most healthy way. So that's where our attention is. I would love there to be a day down the road where we feel really great about that new user experience and retention and we can widen the aperture. But today, it's technology, it's teams, it's those experts that can help us realize the core value prop of Reddit.

Okay. Super clear. We only have a few minutes left, but I want to try to bring all of our conversation together in maybe sort of one big-picture question. I don't know if it will be one answer or if we'll go a little bit deeper. But if we think about what you've talked about so far, Steve, the business is operating at a certain level of growth and a certain level of margin that's very good. And then there's these debates around users and Google and other things. So you have a business operating on one side and a stock that's down year-to-date. Talk a little bit about what you think investors might be missing in the scheme of the stock relative to what you see from inside the company and the way the business is operating?

Sure. So that's a great question. If I were to go through the misconceptions that I hear a lot, I'd start with, one, people wonder about just the TAM for Reddit. They'll say, Reddit is a niche product. I'd say, look, Reddit is a community product and every person belongs to communities, has interests and passions. Therefore, the TAM of Reddit is the entire Internet. Now Reddit's communities might be niche, but it's every niche. And not all of our communities are niche, right? Our communities also represent news, sports, politics, video games, these like massive, massive categories. So that's one, is people just think Reddit is always going to be smaller than the biggest people. And I would say Reddit can be as big as anybody. The second, it sits downstream from that, is I think investors worry that Reddit is going to get stuck at the $4 billion to $5 billion revenue range because some of our similarly scaled peers have gotten stuck there. But the difference between Reddit and I think the other people at our scale is, again, that our TAM is literally everybody. It's not a product that's episodic. It's not a product that's limited demographically. Literally, if you're, call it, over the age of 17, men, women, nerd, normie, super Internet user, casual, like there's something on Reddit for you for sure. And combine that, so the universal appeal on the user side, 40% of the conversations on Reddit are commercial. So it makes Reddit a natural place for advertisers to be. Every company's customers are on Reddit somewhere, probably talking about their company, if not their space or specific product. So the commercialization -- the commercial opportunity is actually far greater than I would have even guessed a decade ago. So my partner in running Reddit, Jen, she joined us about 8 years ago, we were sub-$100 million in revenue, now we're coming up on a $3 billion run rate. So she and the team have built an incredible revenue engine here that shows no sign of slowing. We've been 60% for the last 2 years. And I think on the user side, we have so much opportunity, and user growth drives revenue growth. The third is that our ads business can't be as good as Meta or Google because we don't have the social graph. But we have the interest graph, which I would argue is even more valuable. Like we know what you're interested in, what you're thinking about buying, what you're thinking about doing. Like on Reddit, these may not sound like commercial queries at first glance, but everything I'm about to say really turns -- boils down to, what should I buy? But it's not, what should I buy? It's, what should I wear? What should I watch? What game should I play next? Where should I go on vacation? What's the best restaurant? What's the best service provider? These are just things that people talk about. Not just talk about on Reddit, this is like what people talk about. It's just whatever you talk about in the real world, people also talk about on Reddit. And so there's an opportunity there to make that connection between the user and the purchase, between the user and the brand, I think, in a really direct way. And then the final misconception that I hear all the time is that AI kills Reddit. I mean, ironically, AI doesn't exist without Reddit. But the principle here is that in an AI world, there's a premium on human experiences. All of the things I've mentioned about Reddit, like all of the human perspective that drives those purchasing decisions, all of those stories that people tell on Reddit but don't tell anywhere else, this is like the GirlDinnerDiaries example -- now, by the way, there's also a BoyDinnerDiaries, and all these other like offshoots. The girls are funnier in this case. Those things don't -- AI can't do that. And so AI can replace a lot of commodity content. It can make navigating search results more effective. But it's not going to hold a conversation about the things you care about. And to the extent that it can, it's coming from Reddit anyway. And so we have a say in that matter.

Okay. All right. I think with a few minutes to go, we're probably going to leave it there, unless maybe -- I'll maybe just ask it this way to kind of bring it all together. So you talked about the content side, you talked about the feed side, you talked about growing the user base from the traffic you're getting today. Which of these would you tell people to focus the most on in terms of where you're spending your most time when you think about the next 12 to 18 months?

So as it happens, growing the users, both improving new user retention and improving the core user experience, everything points to more or less the same work, which will come down to: when you open the app, can we get you to the place that you're trying to go as quickly as possible? Are you there to be entertained? Let's show you a few funny posts. Do you want an overview of what's going on? Let's show you some news and trending. Are you trying to play a game? We've got those. Are you looking for the game thread for the game you just watched? Like a sports game. We've got those too. So that work that I've been reducing to a single word, the feed, is what's absolutely the most important. So that investment in the feed, that investment in the feed UI, that AI investment into the guts, the back-end of feed, that's what's absolutely the most important. Because we have so many new app downloads every day of people who want to be Reddit users, capturing them and getting them to come back the next day and the next week, that drives the core user base, that drives the content ecosystem and that drives ultimately the ad impressions that fuel our business. So more users returning into the app every day, that drives the whole business. So that's basically our single-minded focus right now.

Understood. All right. Well, Steve, thanks so much for coming to the conference and being part of the conversation this year. Please join me in thanking Steve and the Reddit team for being a part of the conference.

Thank you all. Thanks, Eric.