Reddit Q2 FY25 earnings call RDDT

Reddit achieved its fastest quarterly revenue growth since 2022, reaching $500 million, a 78% year-over-year increase. This strong top-line performance fueled record profitability, with Adjusted EBITDA hitting $167 million (33% margin) and GAAP net income reaching $89 million (18% margin). Gross margins expanded to 90.8%, marking the fourth consecutive quarter above 90%, demonstrating the scalability of Reddit's financial model.

Management emphasized Reddit's unique and essential role as a data source for AI and LLMs, noting it is the #1 most cited domain for AI across all models. They believe human conversation on Reddit is becoming more important in an automated world, providing valuable, real-world perspectives that AI cannot invent. The company is still learning the full extent of its data's value and how future partnerships might evolve, but sees significant strategic opportunity.

Reddit is focusing its product strategy on three key areas: core product improvements, making Reddit a go-to search engine, and international expansion. For the core product, efforts are concentrated on intuitive onboarding, lowering login barriers, and using AI for real-time personalization and community discovery. The search strategy involves unifying the traditional Reddit search with the new Reddit Answers product, which has grown to 6 million weekly users, into a single, front-and-center experience.

International expansion is a key growth flywheel, with machine translation now live in 23 languages across Asia, Europe, and Latin America. This is complemented by localized content, app experiences, and skilled moderator recruitment to build self-sustaining local communities. Early results are promising, with a brand campaign in France boosting awareness and bringing in new users, and the company aims to incorporate UI improvements from Reddit Lite tests globally.

The advertising business saw 84% year-over-year growth, driven by broad-based strength and increased investment from existing advertisers. Key advancements include the general availability of Dynamic Product Ads (DPA), which deliver 2x higher ROAS than standard campaigns, and the tripling of CAPI-covered conversion revenue. Reddit also introduced 'Reddit Community Intelligence' at Cannes, powering products like Reddit Insights and Conversation Summary Add-Ons, the latter delivering over 10% higher click-through rates.

Reddit initiated new marketing investments in Q2, totaling a few percentage points of revenue, to drive brand awareness and performance outcomes in both U.S. and international markets. These investments, alongside increased hiring in consumer-facing areas like sales and ad tech, contributed to a 38% year-over-year increase in total adjusted costs. The company plans to continue these investments in H2 FY25, modulating spend based on market traction and user retention.

Reddit's financial model demonstrated strong scaling, with incremental adjusted EBITDA margins of 58% in Q2, well above the 50% long-term target. Free cash flow reached $111 million for the quarter, with $237 million year-to-date. Cash and investments surpassed $2 billion for the first time, ending at $2.06 billion, up $109 million sequentially, providing a healthy financial position.