Reddit wants to compete in search
Reddit CEO Steve Huffman has outlined a long-term strategy for continued revenue growth that includes leaning in to the platform’s usefulness as a search tool and expanding revenue from small and medium-sized businesses (SMBs).
The company reported a strong 56% increase in ad revenue to $315.1m in Q3, the third such public report since Reddit floated in March.
Notably, it has attained profitability for the first time, reporting an adjusted Ebitda (the company’s measure of profit) of $94.1m, compared with a $6.9m loss in the same period last year.
Total revenue growth was 68% to reach $348.4m, with non-advertising revenue up a massive 547% year on year to $33.2m due to a low base. This growth was driven by data-licensing partnerships that Reddit signed earlier this year with AI companies.
Daily active unique users also increased 47% year over year to 97.2m — this included international daily active user growth of 44%.
While Reddit’s growth figures are strong, it should be noted that they come from relatively modest bases compared with some of its competitors.
Snap, which also reported Q3 results on Tuesday, earned $1.4bn in ad revenue in Q3 and now has 443m daily active users. Meta, which reports results after the bell on Wednesday, pulled in over $38bn in ad revenue in Q2 across its various platforms.
Analysis: Search a ‘focused area of investment’
In the company’s earnings call, Huffman said a key part of Reddit’s medium- to long-term strategy is improving the platform’s search experience, with an eye towards both enhancing the overall consumer experience as well as competing more directly for search spend further down the line.
“We want to ensure that all users have the best experience possible,” said Huffman. “This includes users coming to Reddit from external search and those searching directly on Reddit who are looking for recommendations on what to buy, what to watch or what products or services are the best.
“We know many users are looking for more than just answers. They are looking for authentic real-world insights and advice from the communities on Reddit. So we’re focused on making the experience of finding relevant conversations and content on Reddit easier and more intuitive.”
Huffman added that Reddit has always had a “symbiotic” relationship with Google Search, pointing to the stat that “Reddit” was the sixth-most Googled word in the past year, with many consumers developing the habit of adding the word on to Google queries to receive answers from Reddit communities. “They’re using, in this case, Google to navigate Reddit,” Huffman explained.
In addition, a second class of users are running a more general search on Google and then ending up on Reddit without intentionally seeking out answers from the platform. As he noted: “We think of these users as an opportunity to teach people that Reddit has the answers to their questions.”
Huffman said search will be an area of “focused investment” as the company heads into 2025, with a long-term strategy for monetisation.
“I think the timeline for monetisation is: first, we think about the consumer product. We’re doing some heavy lifting on both the back end and the front end.
“When the product is in a more stable configuration, then we can start working on monetisation, which I think is, of course, a big opportunity. First users, then monetisation. But it’s one of our top investments heading into next year.”
Ad revenue growth driven by long tail
For now, much of the growth driving Reddit’s business is coming from SMB customers, which chief operating officer Jen Wong said grew 80% year on year.
Overall, around 60% of total ad revenue was attributed to performance revenue in Q3.
Wong explained that Reddit saw strength across advertiser verticals, including automotive, consumer goods, financial services and pharmaceuticals, which all added new clients. This included in international markets, where revenue grew 57% year on year, with particular strength in EMEA among both large and mid-sized customers.
Advertisers are adopting Reddit’s automation tools, including auto bidding, which has in part led to nearly 50% quarter-on-quarter growth in the number of ad conversions, Wong added.
She said: “Over the course of the year, we invested across a few broad categories: ads manager improvements that consolidate steps and remove manual work from campaign creation; automation tools that make it easier to create performance campaigns and reduce the need for manual optimisation.”
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Such tools have been particularly popular among brands for lower-funnel campaigns, said Wong, but more work needs to be done to capture an even larger share of adspend among SMBs.
“I think we have now developed a product that is market-competitive in terms of performance outcomes,” she continued. “But it has to be simple in order for smaller advertisers to take advantage of that, which means automation, really end-to-end simplicity, and we’re not there yet… That will unlock more advertisers.”
She added that Reddit is also exploring opportunities in shopping, which would further boost lower-funnel performance, but she called its development “a longer journey”.
Trend towards performance
The move to chase the long tail of ad budgets through the development of AI performance tools comes amid a broader push by media owners to go after SMBs, which account for the majority of revenue at major tech giants like Google and Meta.
Other social companies, including Pinterest and Snap, have also released AI tools to deliver performance for smaller advertisers spending on their platforms.
In Snap’s own earnings report, the company noted that the “combination of more performant DR [direct response] products, go-to-market operations optimised for SMB customers and easier onboarding and integration tools are helping rapidly expand our SMB customer base”. As a result, Snap’s total active advertisers more than doubled year on year.
Madison and Wall principal Brian Wieser called Reddit and Snap’s rapid growth from smaller advertisers and performance-based products “noteworthy” because they have “allowed each of these companies to grow faster than they might have otherwise”.
He added, however, that SMBs “aren’t necessarily growing their overall adspending any faster than larger advertisers” and that it is difficult to measure the degree to which Reddit and Snap are taking a greater market share of SMB budgets or otherwise outperforming growth in the digital ad market more broadly.
Wieser suggested that Reddit’s “solid growth will inevitably continue from the company’s current modest base of ad revenue” and, if it maintains its expected ad revenue growth next quarter, Reddit would surpass $1bn in ad revenue for the year.