Tech Companies Report Mixed Q2 2024 Earnings: ON24, Revolve Group, and Reddit Face Challenges

ON24, Inc (ONTF) Q2 2024 Earnings Call Transcript

Sayo Denloye - Investor Relations Sharat Sharan - Co-Founder and CEO Steve Vattuone - Chief Financial Officer Greetings and welcome to the ON24 Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sayo Denloye, Investor Relations. Please, go ahead. Sayo Denloye Hello and good afternoon, everyone. Welcome to ON24 Second Quarter 2024 Earnings Conference Call. On the call with me today are Sharat Sharan, Co-Founder and CEO of ON24, and Steve Vattuone, Chief Financial Officer of ON24. Before we begin, I would like to remind everyone that some information provided during this call will include forward-looking statements regarding future events and financial performance, including guidance for the third quarter and full fiscal year 2024, as well as certain third quarter and full year non-GAAP projections. These forward-looking statements are subject to known and unknown risks and uncertainties that could adversely affect ON24's future results and cause these forward-looking statements to be inaccurate, including our ability to grow our revenue, attract new customers and expand sales to existing customers, the success of our new product and capabilities, other statements regarding our ability to achieve our business strategies, growth, or other future events or conditions, such as the impact of adverse economic conditions and macroeconomic deterioration, including increased inflation. ON24 cautions that these statements are not guarantees of future performance. All forward-looking statements may today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings and today's financial press release for factors that could cause our actual results to differ materially from any forward-looking statements. We also like to point out that on today's call, we'll report both GAAP and non-GAAP results. We use these non-GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non-GAAP financial measures, please refer to today's financial press release. Thank you, Sayo, and welcome to our second quarter, 2024 financial results conference call. With me today is Steve Vattuone, our Chief Financial Officer. I'm excited by our results in Q2 and pleased to report another quarter of solid momentum. We delivered Q2 revenue and non-GAAP EBIT above guidance and executed on our profitability targets, achieving positive adjusted EBITDA and positive non-GAAP EPS for the fifth quarter in a row and also achieved positive free cash flow for the second consecutive quarter. Revenue from our core platform, including services, Q2 of 2024 was $36.5 million, and total revenue, including virtual conference, was $37.3 million. Of total revenue for the quarter, subscription and other platform revenue was $34.1 million and professional services revenue was $3.2 million. We remain laser focused on returning to ARR growth. We ended Q2 with $131 million of ARR related to our core platform, a decrease from Q1 of $2.2 million, which is meaningfully better than the expectations we provided on our last earnings call. What really excites me are the dynamics behind these metrics. Importantly, our focus on improving our in-period growth retention rates is bearing fruit. The changes we have made, organizationally and execution-wise, are resulting in an improvement, and for the third quarter in a row, growth retention trended much better than the average rates we've seen for each of the past three years. In fact, Q2 growth retention improved sequentially from last quarter, and we posted close to double-digit improvement from Q2 of 2023. Disaggregating growth retention into churn and downsells, we saw a huge improvement in churn in Q2, and in fact, it matches the best it has been in the last three years. In addition, we saw meaningful reductions in downsells as a percentage of the renewal base in Q2, close to the best in the last three years. Finally, we were pleased that large customer renewals that came due in Q2 were better than expected, with half of them resulting in growth. It is great to see the results of our strategic priorities beginning to pay off, and I'm really proud of the team's successful execution, especially as we have navigated through a tough macro environment over the last two years. While we are controlling what we can control and improving our execution, the macro environment remains challenging. We continue to believe that as marketing budgets normalize, customers will reinvest in revenue-generating initiatives, especially those that prioritize AI technology, such as our AI-powered ACE, short for Analytics and Content Engine solution. We continue to see traction with our AI-powered ACE solution, with AI-powered ACE ARR growing to the high teens as a percentage of growth ARR during Q2. This rate has nearly doubled since last quarter. We are establishing ourselves as the AI platform for real-time, intelligent digital engagement, and AI-powered ACE is helping us across three vectors, new business acquisition, customer expansion, and improved retention. We expect AI-powered ACE to continue to ramp throughout the year, giving us a tailwind to drive ARR growth in the future. As we look to the second half of the year, we are balancing our enthusiasm around the progress we have made in the first two quarters, with the reality that forecasting ARR in this environment, more than one quarter ahead, remains challenging. We expect sequential improvement in ARR performance in Q3, with net new ARR of break-even to negative 1%, and anticipate a similar performance in Q4, assuming there is no further deterioration in the macro. We believe we are turning the corner towards the achievement of positive ARR. I believe we are making progress towards re-accelerating our business, especially in the enterprise, due to the success we are seeing across the strategic growth priorities, which are, one, innovating our platform with our AI-powered ACE solution. Two, executing our enterprise go-to-market focus, especially in highly regulated industries, and three, delivering on our profitability targets while returning to growth. Let's start with an update on our platform's AI innovation and the momentum of our AI-powered ACE solution. In June, we hosted our annual user conference, the ON24 Experience, where we gathered thousands of our customers and prospects across the globe, including half of our enterprise customer base, with industry leaders like Grant Thornton, a provider of audit and assurance, tax and advisory services, Guardian, the modern mutual insurance company, SAP, a multinational software company, and Sun Life, U.S., one of the largest providers of employee and government benefits and more, who shared the exceptional customer experiences and significant revenue impact they're delivering to our platform. We are extremely excited by the positive feedback on our platform roadmap and the customer success stories being shared by our early adopters of AI-powered ACE. One of our customers, a multinational $5 billion software company, shared how they can now target and personalize for different countries with just one experience, promoting the different products that are available and applicable to different markets, and even translate them into a number of different languages, providing significant time savings to the field marketing teams. Another customer, the IT services and consulting company, with over a thousand employees, spoke about how AI-powered ACE has tripled their reach and engagement year-over-year and helps them create content four times faster. A similar result was shared by one of the nation's top accounting firms, who said AI-powered ACE helps them speed up their entire content process, get campaigns to market much more quickly, and tailor their certified professional education programs for different verticals to differentiate from the competition. These stories are just a sample of how AI-powered ACE is delivering tremendous value and benefit to our customers, helping to improve retention and fuel expansion within our install base. Let me explain further the power of AI-powered ACE. AI-ACE helps uniquely solve some of the biggest challenges that enterprise sales and marketing teams face today. As of Q2, the percentage of our install base that has used or tried our AI capabilities is in the high teens. First on this list is the need to personalize at scale. Nearly every CMO I talk to has a goal to deliver a more personalized, intelligent, and differentiated digital experience to their customers and prospects. Yet most currently lack the resources, the data, and the technology to do so. Our AI-powered ACE solution gives an immediate and simple way for their team to target and engage at scale their business's highest priority audiences, such as top accounts, important channel partners, and executive decision makers. Our ability to meet the imperative of personalization is giving us a way to further differentiate a platform for mission-critical go-to-market use cases like demand generation, customer marketing, professional certification, and training, partner enablement, and compliance-driven digital transformation use cases. For example, one of our biggest expansions in Q2 was with a multi-billion dollar global telecom provider. After standardizing their marketing teams on our platform last year, their partner enablement team came to us to help them personalize the way they educate their network of resellers and channel partners on specific product offerings, helping to strengthen a critical revenue stream for their business. By upgrading to our AI-powered ACE solution, their team can dynamically personalize content experiences based on partner tier and type. Their adoption of AI-powered ACE has increased their investment with us by more than 25%, while saving them hundreds of thousands of dollars in agency man-hours and consolidating point solutions in their tech stack onto our plan. AI-powered ACE also helps reduce the burden of content creation, a common pain point across each of the industries we serve, whether it's enabling investors and financial advisors in the financial services and asset management space, delivering medical education to healthcare professionals in the life sciences sector, or certifying business professionals in the professional services vertical. Content is the lifeblood for B2B sales and marketing teams. It's also where organizations often are not resourced with sufficient headcount and budget to keep up with the speed and scale their business needs. AI-powered ACE is solving this problem head-on by automatically turning one webinar experience into AI-generated content and videos, multiplying content production by at least five times, and according to some of our customers' feedback, reducing workloads by 80%. Importantly, our platform provides enterprises these powerful AI solutions in a manner that supports security and compliance. As a trusted and proven provider who are install-based, we are hearing from our customers that being able to use AI within the platform they already have is preferred to acquiring net new technology. To give you more color on this, one of our long-standing financial services customers with over $1.5 trillion in assets under management upgraded to AI-powered ACE this quarter. With so much time and effort spent by their subject matter experts developing fund updates and market analysis, getting more from their highest value content. Without additional headcount, it was a big benefit. And the ability to use generative AI from an already approved platform and within their existing compliance process helped to further accelerate their decision upgrade to ACE given the faster and easier path towards adoption. They're among the first technologies chosen for the company's cross-functional AI roadmap resulting in over 20% expansion. The third main benefit of AI-powered ACE is driving continuous prospect in customer engagement to automated content nurturers. To successfully win and keep customers, companies need to manage a mix of many digital channels. Just having a website and sending one-off emails won't cut it anymore. Using multiple digital channels takes a lot of effort and constant hands-on maintenance. Our platform helps alleviate that resource drain by quickly populating, building, and delivering streams of digital content and videos and dynamically personalizing the experience for audiences. Moving to our second strategic priority, our enterprise go-to-market. When it comes to our enterprise go-to-market strategy, we continue to focus on mission-critical use cases in regulated industries, including life sciences and financial systems. Because our enterprise-grade platform supports stringent compliance standards, we believe we have a differentiated solution with an ideal product-market fit for these verticals. And our results are validating our strategy as we saw sequential and year-over-year core ARR growth of the life sciences and financial services verticals in Q2. I'm especially excited about the momentum we are seeing with life sciences. So let me give you some more cover. There's been a massive acceleration of digital transformation in this category, especially in pharmaceuticals. And we believe this trend has been and will continue to be a growth vector for our business. We've put a specific focus on our go-to-market execution in life sciences and pharma, and have dedicated some of our product development to address their specific needs. As a result, our life sciences segment is one of the highest performing parts of our business. As an example, one of our strategic customer relationships is with one of the world's top five pharmaceutical companies where we power their digital healthcare professional engagement strategy. To give you a sense of the scale we are driving for them, last year they engaged hundreds of thousands of healthcare professionals in more than 10 languages across 50 countries to our planet. Our breadth of capabilities and depth of pharma expertise also puts us in a strong position for new business acquisition. In Q2, we brought on an over $10 billion animal healthcare and pharmaceutical company who needed to centralize the global healthcare professional engagement strategy onto one platform that's purpose-built for the enterprise. Because their legacy system lacked the deep engagement and first-party data we provide, and did not integrate with their CRM system, they were spending weeks and weeks trying to manually analyze and manage customer engagement data. By moving onto our platform, we will be able to scale their program efficiently, and with our engagement data and integrations, we will be able to automate their marketing and sales processes while gaining insights they can't get from any other digital channel. Outside of regulated industries, we continue to provide a differentiated solution that drives value for our customers. One of our largest new deals in Q2 comes from a nearly $700 million global technology company that provides marketing automation to e-commerce. After a period of rapid growth, their team was looking to advance their marketing maturity to an enterprise-grade platform. They're investing in our full platform suite because of its ability to help them deliver consistent, data-driven, and personalized experience across the entire customer journey. We will utilize our platform to power the global demand generation, customer marketing, and partner marketing teams, which is especially important as the organization moves up market and focuses on sales-led growth. Next, I'll turn to profitability. As I mentioned at the start of my remarks, we are pleased to achieve our Q2 profitability targets again, delivering positive adjusted EBITDA and positive non-GAAP EPS for the fifth consecutive quarter. We expect to be adjusting EBITDA positive for 2024, exceeding our breakeven target. We remain committed to our long-term profitability target of generating double-digit EBITDA margins. Coming off our Q2 performance, I believe we are making progress toward re-accelerating our business, especially in the enterprise. AI adoption is a business imperative, and our AI-powered ACE is a differentiated solution that has a strong product-market fit due to its enterprise-grade capabilities and its ability to improve efficiency and increase revenue results. Q2 marked performance gains for our enterprise business. The average core ARR per customer in Q2 was consistent with the high watermark we reached last quarter. In addition, our percentage of ARR in month-year agreements, the percentage of customers using two or more products, remained at record levels. I'll conclude by reiterating my enthusiasm for our performance in the quarter and the progress we have made in the first half of this year. We are encouraged by another quarter of improvement in the stability of our installed base with gross retention improving sequentially from last quarter and trending much better than the average rates we've seen each of the past three years. We are seeing traction around our AI-powered ACE solution with the percentage of growth ARR in Q2 from AI-powered ACE nearly doubling from Q1 on the operational front. We are successfully executing our strategy to focus on digital transformation use cases while making these achievements with a streamlined organization that is meeting our profitability targets. As we look at the second half of the year, we will build on the progress we made in the first two quarters. We believe we are at the beginning of a turning point. We are laser-focused on execution and moving back to positive ARR. We expect continued improvement into 2025. Longer term, we believe we are attacking a massive market opportunity by enabling B2B companies to leverage ON24 digital engagement platforms to more efficiently grow revenue and engage and understand their customers and prospects. We believe the strength of our platform and the continued execution of our strategic growth priorities will pave the way for success and enable us to ultimately reach our long-term targets of double-digit revenue growth and double-digit EBITDA margins. Thank you, Sharat, and good afternoon, everyone. I'm going to start with our second quarter 2024 results, and we'll then discuss our outlook for the third quarter of 2024 and full year 2024. Before I get into the numbers, I wanted to remind everyone that our focus, as it was in the prior quarters, will be on the core platform business as we have de-emphasized the virtual conference product. We view the metrics from our core platform, such as revenue and ARR, as the best KPIs to measure our performance. Revenue from our core platform, including services in Q2 of 2024, was $36.5 million, representing a decrease of 10% year-over-year. Total revenue for the second quarter, which includes revenue from our virtual conference product, was $37.3 million. Total subscription and other platform revenue was $34.1 million. Overages represented approximately 1% of total revenue in Q2. Total professional services revenue was $3.2 million, a decrease of 15% year-over-year, representing approximately 9% of total revenue, the same as in the year ago period. Moving on to ARR. ARR represents the annualized value of all subscription contracts at the end of the period and excludes professional services and overages. Ending ARR related to our core platform totaled $131 million, a decrease of $2.2 million compared to Q1 of 2024, which is meaningfully better than the expectations we provided on our last earnings call and was driven by the continued trend of increased stabilization in our install base over the past several quarters. As Sharat discussed, in-period gross retention in Q2 improved by close to double digits as compared to Q2 of last year, and also improved sequentially from Q1. While customers are still being cautious about making new purchasing commitments, we are encouraged by the signs of stabilization we are seeing in our business. Total ARR, including our ARR contribution from our virtual conference product, was $133.7 million at the end of Q2 2024. Turning to customer metrics. The ARR contribution from the $100,000 plus customer cohort continues to represent approximately two-thirds of our total ARR, which is consistent with the prior quarter and demonstrates the continued strength of our largest enterprise customers and their commitment to our platform. The number of customers contributing more than $100,000 in total ARR was 319. As we have discussed on prior calls, enterprise customers continue to be our focus, and we have seen these customers continue to make longer-term commitments to our platform. The percentage of our ARR in multi-year contracts increased sequentially from Q1 and is now at record levels with over 50% of our ARR in multi-year agreements. In Q2, the average core ARR per customer was consistent with last quarter at approximately $78,000 per customer. Total customer count at the end of Q2 was 1,682. Before turning to expense items and profitability, I would like to point out that I will be discussing non-GAAP results going forward. Our non-GAAP results exclude stock-based compensation, restructuring charges, impairment charges for real estate, amortization of acquired intangibles, shareholder activism-related costs, as well as certain other items. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found within our earnings release. Our gross margin in Q2 was 77%, consistent with the past two quarters and up 200 basis points from Q2 of last year. Our gross margins reflect the cost reduction actions we have taken to streamline our operations. Now turning to operating expenses. Sales and marketing expense in Q2 was $15.8 million, compared to $18.3 million in Q2 last year. This represents 42% of total revenue, compared to 43% in the same period last year and 43% last quarter. Our sales and marketing expenses have decreased in absolute dollars, both sequentially and year-over-year, largely due to the cost savings measures we have implemented, resulting in a more efficient go-to-market organization as we continue to focus on driving improved sales efficiency. R&D expense in Q2 was $6.7 million, compared to $7.6 million in Q2 last year. This represents 18% of total revenue, compared to 18% in the same period last year and last quarter. While our R&D expenses have decreased in absolute dollars over the past year, we continue to invest in product innovation to drive the next generation of our platform, which includes AI-powered ACE, which we launched earlier this year. G&A expense in Q2 was $6.5 million, compared to $6.7 million in Q2 last year. This represents 17% of total revenue, up slightly from 16% in the same period last year and down from 18% last quarter. We have taken actions to streamline our G&A functions and reduce our G&A costs, and as a result, our G&A expenses in absolute dollars have decreased as compared to the prior quarter and prior year. Moving on to our bottom line performance, I'm pleased to report that we exceeded the profitability targets that we provided in the prior earnings call. We achieved positive adjusted EBITDA and non-GAAP EPS profitability in Q2. This marks the fifth consecutive quarter of positive adjusted EBITDA and non-GAAP EPS profitability. As we enter the latter part of 2024 and head into 2025, we do so with a more efficient and streamlined cost structure, which will provide operating leverage to our business heading into 2025. Operating loss for Q2 was $0.3 million for a negative 1% operating margin, compared to an operating loss of $0.9 million in a negative 2% operating margin in the same period last year. Net income in Q2 was $1.5 million, or $0.03 per share, based on approximately 45.8 million diluted shares outstanding. This compares to net income of $2.1 million, or $0.04 per share in Q2 last year, using approximately 50.7 million diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $193.8 million in cash, cash equivalents, and marketable securities. In March of this year, we announced a new $25 million share repurchase program, which runs for one year until March 2025. This new share repurchase program follows the completion of two earlier capital return programs, which collectively returned $166 million to shareholders between December 2021 and February 2023. Under the new $25 million share repurchase program, we have utilized $8.3 million to date, with approximately $5 million utilized in Q2 of 2024, and approximately $3.3 million utilized thus far in Q3. With almost $194 million of cash and investments at the end of Q2, our balance sheet remains strong. Turning to our cash flow metrics for Q2, cash provided by operations in Q2 was $1.4 million compared to cash used in operations of $4.3 million in Q2 of last year. Free cash flow was positive $0.9 million in Q2 compared to negative $4.9 million in Q2 last year. This is our second quarter in a row of positive free cash flow. As a reminder, our cash flow in Q2 includes $0.8 million related to our restructuring efforts. Before moving to guidance, I wanted to emphasize that, as Sharat and I have discussed, we continue to see improved stability in our installed base with improvements in gross retention and momentum from our AI-powered ACE solutions, which drove improved ARR performance in Q2 as compared to Q1. We expect to see further sequential improvement in ARR performance in Q3 as well. While we continue to see improved stability in the business, and we did make progress on new business performance in Q2, we also continue to operate in an environment where customers are deliberate about making new purchase commitments as marketing budgets continue to face pressure. This macroeconomic uncertainty continues to make it challenging to forecast ARR more than one quarter out. Taking these factors into consideration, we anticipate net new ARR of breakeven to negative 1% in Q3 and anticipate similar performance in Q4, assuming there is no further deterioration in the macro environment. ARR, from our de-emphasized virtual conference product, is expected to reduce by approximately $0.2 million in Q3 compared to Q2, and it is expected to be $2.5 million at the end of Q3. Turning to Q3 guidance, we expect Q3 core platform revenue, including services, in the range of $34.2 million to $35.2 million, and total revenue, which includes our virtual conference product, in the range of $35 million to $36 million. Professional services is expected to represent approximately 7% of total revenue. We expect gross margins to be in the mid-70s in Q3. We expect a non-GAAP operating loss in the range of $2.3 million to $1.3 million, and non-GAAP net loss per share of $0.01 per share to non-GAAP net income of $0.01 per share, using 42 million basic and diluted shares outstanding and 46 million diluted shares outstanding, respectively. We expect a restructuring charge of $0.4 million to $0.7 million in Q3, related to our ongoing cost reduction efforts, which is excluded from the non-GAAP amounts provided above. Now let me turn to our annual guidance. For the full year, we expect core platform revenue, including services, to be in the range of $141.7 million to $144.5 million. We expect total revenue to be in the range of $145 million to $147.8 million. Professional services is expected to represent approximately 8% of total revenue. We expect a non-GAAP operating loss in the range of $4.5 million to $3 million, and non-GAAP net income per share of $0.05 per share to $0.08 per share, using 45.5 million diluted shares outstanding. We expect gross margins for the year to be marginally better than 2023 gross margins, which were 75%. We are committed to achieving positive adjusted EBITDA for 2024. Regarding the second half, we expect EBITDA will be modestly negative in Q3, but that it will be positive in Q4 and for 2024 overall. The structuring charges and amortization of acquired intangibles and certain other items are excluded from the full year non-GAAP amounts provided above. This guidance reflects a balanced approach between maintaining cost discipline but also allowing us to invest to return to growth. In summary, we are pleased with the results for the quarter and the progress we have made driving improvements in our installed base performance metrics and with the momentum of our AI-powered ACE solution. We have a strong customer base and differentiated products and we are well-positioned to achieve our long-term goal of generating double-digit top-line growth and double-digit EBITDA margins. With that, Sharat and I will open the call up for questions. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. First question comes from Arjun Bhatia with William Blair. Please go ahead. Arjun Bhatia Hey guys, thanks for taking the questions here. Sharat, I think you mentioned in your prepared remarks that it was about half of the customers that came up for renewal in the quarter resulted in growth. I don't know when the last time it was that that was the case. But can you just give a little bit more color on what are customers buying when they are expanding? Is it the core platform? Is it ACE? Where do you see most of that upsell and expansion coming from? Sharat Sharan Yes, Arjun, let me first clarify. I think what we talked about -- last quarter, we had given guidance that we had some large renewals coming up, and we set the expectations appropriately. So the comment that I made about half of the customers that we got growth is for the large customer renewals that were coming up. These were seven figure deals that were coming up for the core. That being said, after the clarification, let me give you a sense of what people are doing on the platform to expand, because one of the things that we have talked about that our gross retention improved, downsells were probably the best as a percentage of renewal cohort, close to the best in the last three years. And when people are buying, there are three different dynamics of buying. One is, as you've heard, sometimes we are going in technology, we're going from demand generation, to customer marketing, to partner enablement. So we are buying -- people buying different licenses. The other is related to our expansion and getting other additional product use cases, whether it is engagement hub and target for the always on and on demand engagement use cases, or whether they are things like go live, which is for the event management use cases, so one platform for intelligent digital engagement. And then the third layer that we add on top of that is the AI powered ACE platform now, which allows them to do hyper personalization at scale. And then the second area is allows them to do automated content creation and nurture. So -- and on that AI powered ACE, from a total growth ARR, both new and expansion, reached close to high teens of total growth ARR. So we were very encouraged by that, it almost doubled compared to the first quarter. So hopefully that helps. So overall, downsells in better shape than we were before, close to the best, and continuing to see traction on expansion and AI-powered ACE and our other metrics. Would I like expansion to still be more? Yes, but in the current environment, I'll take it. Arjun Bhatia Okay. And have you -- and when you're coming up on these conversations with customers, have you made any changes to how you're approaching pricing dynamics? I think if I remember back, you'd kind of always viewed yourself as a premium solution in the market with the marketing budgets, the way they are now and the general kind of macro economic certainty, how are you approaching pricing? Sharat Sharan Yes, I think there are two or three things that we are doing at a strategic level. So first of all, when things do come up for renewal and somebody wants a downsell, first thing that we would basically do is we would bring the other products and growth in other parts of that organization with the engagement hub product, the target product or the go-live product. So we're trying to basically expand the use cases, bring others to basically, take care of the downsell and also AI-powered ACE helps in that also because you're basically giving them additional use cases. The other thing that we're also doing, if we are confronted with a downsell, that's also where we are going to customers and saying, okay, you had an annual deal with us, now we will look at this, but we need a three-year deal. And even there, we have a price increase on an annual basis, but that's how our multi-year ARR is the highest that it's ever been and north of 50%. So those are the two or three different dynamics that we play and overall very encouraged that in addition to churn, but our downsell performance as a percentage of renewal ARR was close to the best in the last three years. Arjun Bhatia All right. And last one maybe for Steve. Just as I'm looking at the margin trajectory, it seems like certainly you're making a little bit of progress here, but when I look at the sales and marketing line and what your spend is there, it still looks like it's a little elevated compared to some of your peers with similar growth rates. So, when you think about sales and marketing spend, how long do you think that takes to kind of get to maybe 30% of revenue? And when you're thinking about your long-term targets, do you need to get the business to back to a certain growth rate to be able to hit your long-term profitability targets or can that happen at sort of flattish maybe revenue? Steve Vattuone Well, first off, we're always prioritizing to return to growth and bouncing profitability with that. Now on the top line is, short discussed, we are seeing positive trends in the business with ARR performance improving sequentially and we expect further improvements in the second half as we discussed in the prepared remarks. We are expecting these positive trends in our business to continue into next year. We should start seeing these trends impact the top line in a positive manner. Now in terms of the expense structure, we have that where we want it for the second half of the year with gross margins and the -- we guided to the mid 70s. We're exiting 2024 with positive. We expect to exit with positive adjusted EBITDA on Q4 and for the year. Now we will continue to monitor the cost structure based on what we're seeing in the top line and the go-to-market investments are part of that. We will continue to make select investments and things like product innovation, including AI-powered ACE, which we launched earlier this year. And we are making go-to-market investments regulated industries like financial services and life sciences and short discussed the success we're seeing there. So we believe we can make key investments in the business, get back to positive ARR growth and show improved bottom line performance over time without significantly increasing the top -- the cost structure. In terms of the macro, we obviously can't control that, but our guidance for 2024 assumes no improvement in the macro. And if it gets better, that will of course be a net positive for us. Next question, Noah Herman with JP Morgan, please go ahead. Noah Herman Hey guys, thanks for taking the questions. I'm just coming back to macro a little bit. Last quarter, you sort of layered in an incremental prudence within the guide and understandably with some of the larger renewals coming up in the quarter. But now that we're sort of through that, how are you sort of thinking about the prudence that you are layering to the guide at this point considering the all else equal with the macro? Or are you starting to see some normalization or are you starting to see customers reinvest in some of the revenue generating initiatives and then add a quick follow up? Sharat Sharan Yes, let me take that. You know, Noah, one of the things is for starters, we've been able to diversify our business over the last few years with an increased emphasis on industries that are still in the early stages of digital transformation, primarily life sciences and financial services, including asset management and insurance. In fact, these verticals have grown from 20% to almost a third of our core ARR in just over four years. So, we fundamentally have made broadband improvements to our business. Now, marketing budgets are still tight. We talked about Q2, we had some large renewals coming up, but marketing budgets are still tight and we are not factoring any improvements of that in the second half. That being said, if you look at sales and marketing teams, they're confronting the issues are, hey, how can we do more with less? How can we consolidate point technologies? How can we address multiple go-to-market use cases? How can I prioritize first party data, especially in the edge of AI? So, all these things help us. And we are seeing that in the gross retention improvement and AI-powered ACE adoption. So as I look going forward in the second half, we're not factoring in macro improvement, what we expect sequential improvement in ARR performance in Q3, with net new ARR to be between breakeven to negative 1% of Q2 ARR. And it's the improvement that we are making on the gross retention, on the contribution from AI-powered ACE, of our go-to-market focus on the digital transformation use cases in financial services and life sciences that is allowing us to make those estimates. Noah Herman Got it. And then maybe just quickly on the ARR guide for the second half. Is there any way to quantify, how much of that hinges on the AI-powered ACE offerings? Thank you. Sharat Sharan I think at this stage, we are not providing that guidance. But as I said, to repeat, we expect sequential improvement in ARR performance in Q3 with net new ARR to be breakeven to negative 1% of Q2 ARR. As we look at the second half, we are balancing our enthusiasm around the progress we have made this year with the reality of a tough macro environment for front end software. And that it is tough to forecast ARR more than one quarter ahead in this environment. No, I can give you gross retention within a range, but growth ARR is difficult, especially with a business focused on enterprise business, about 70% of which our business is that. So at this stage, we expect Q4 ARR to be between breakeven and negative 1%, similar to Q3. And we expect continued improvement in our stabilization, improvement in gross retention, both from a churn and downsell perspective. I think AI-powered ACE is going to continue to ramp in the second half and we provide tailwinds into 2025. And we expect to continue to improve on the financial services and life sciences as a driver of our business. We believe we have turned the corner and remain laser focused on execution. [Operator Instructions] Next question comes from Scott Berg with Needham and Company, please go ahead. Scott Berg Hi everyone. Thanks for taking my questions. I guess I have two, Sharat, in your guidance, you've mentioned a couple of times, you're assuming ARR in Q3 and Q4 will be breakeven to maybe down 1% sequentially each quarter. But as you look back over the last, maybe a couple, three quarters, I know you're hoping to be back to ARR growth here at the end of this year. I guess what's been the difference between your expectation a couple of quarters ago and where the business is today? Has it been more on the net new side or has it been on some of the retention dynamics? Sharat Sharan I think it's probably more on the net new side that we need to see more work. Like Scott, just to kind of give you a sense. I mean, when you talk about the last two, three quarters, I mean, we have seen in those two, three quarters, we've seen improvement in our gross retention. Like I said, Q2 churn, if you just look at dollar churn, it was the best we had in the last three years. If you look at downsells, those were close to the best and we expect those trends to continue. Yes, small up and down is fine, but we expect those trends to continue. I expect AI power days to continue to ramp and that'll help new and expansion and retention. I continue to expect that our focus on life sciences and financial services, the digital transformation use cases will help. But the challenge that it is tough to forecast ARR more than one quarter ahead in this environment. You know how the enterprise businesses and over two-thirds or close to 70% of our businesses focus on enterprise really depend among the last month of the quarter a lot. So I'm encouraged. I'm encouraged by the progress that we are making, but it is hard for me to forecast more than one quarter ahead. And that's why we have provided the guidance that we have. Scott Berg Got it. Helpful. And then from a follow up, you talked about the customer conference that you held in June. I guess what are your kind of key one or two takeaways from the conference in terms of what you're hearing from customers there is? What should we maybe kind of look forward to over the next couple of quarters from a business perspective that you're able to come out maybe enthusiastic from the conference? Sharat Sharan I think there are two or three things that we basically learned. Number one was the enthusiasm of the customers in getting their hands on our AI tools. And I was surprised that we just launched the product in January, AI-Powered ACE. And when we did this conference in June, I think early June, we already had customers with a lot of use cases. If you look at the people who joined are all the larger companies with a lot of use cases, some doing it on the personalization side, some basically doing on the automated content side, so on and so forth. And what that also allowed us to do -- we also run something before the conference called something called a master class for a day. We also were able to learn exactly what their feedback was. What part of the product was not working, whether they want us to see improvement, so on and so forth. So that was very helpful. And having other customers start, hear from the people who have already implemented AI-Powered ACE and the results they're getting on ROI, the results that they're getting on cost savings. And some of that I've talked about in our prepared remarks was very helpful, because customers like to learn from customers. There's one other area of improvement that we learned. We learned that AI-Powered ACE platform is very powerful, but it has a lot of capability. So people were basically saying, hey, if you want faster adoption, do we really need personalization tied to the automated content creation and nurture? So we took that feedback and we are looking at, hey, should we decouple the product more for faster adoption in our platform? So we are looking at those capabilities because sometimes customers want to do personalization, sometimes they want to do automated content creation. So we are trying to basically make those adjustments to get faster adoption of the product. So those are some of the key takeaways that we got. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Revolve Group, Inc. (RVLV) Q2 2024 Earnings Call Transcript

Erik Randerson - VP, IR Mike Karanikolas - Co-Founder & Co-Chief Executive Officer Michael Mente - Co-Founder and Co-Chief Executive Officer Jesse Timmermans - CFO Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's Second Quarter 2024 Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin. Erik Randerson Good afternoon, everyone, and thanks for joining us to discuss Revolve's second quarter 2024 results. Before we begin, I'd like to mention that we have posted a presentation containing Q2 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events and impact, our partnerships and strategic acquisitions, our physical retail stores, and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2023 and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we'll also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures as well as the definitions of each measure, their limitations and the rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. Hello, everyone, and thanks for joining us today. We delivered a strong second quarter, highlighted by a return to top line growth, net income more than doubling year-over-year, and nearly 350 basis point increase in our adjusted EBITDA margin year-over-year. Contributing to the significant growth in profitability was meaningfully better-than-expected marketing efficiency as well as increased logistics efficiencies that also outperformed our guidance, helped by improving trends in our return rate as many of our return-rate initiatives began to take hold late in the second quarter. Most importantly, we achieved these strong results while continuing to invest in initiatives to drive profitable growth and market share gains over the long term. With that introduction, let me step back and provide a brief recap of the second quarter. Net sales were $282 million, an increase of 3% year-over-year that was driven by improved year-over-year trends in both segments relative to our comparisons in the first quarter of 2024. Net sales in the REVOLVE segment increased 4% year-over-year, our best performance in 6 quarters. This was partially offset by a 4% decline in FWRD segment net sales, an improvement of 10 points from FWRD's year-over-year comparison in the first quarter of 2024. While we continue to see headwinds in a dynamic luxury environment where FWRD competes, as one of the financially strongest operators of a multi-brand luxury e-commerce platform, we are actively pursuing opportunities to capitalize on the current environment by investing in strategies to gain market share. Along these lines, Michael will talk about our acquisition of a majority interest in the revered luxury brand and longtime brand partner of FWRD, Alexandre Vauthier. Net income for the second quarter was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year, driven by a nearly 350 basis point expansion of our adjusted EBITDA margin. Beyond the numbers, I'm excited by our team's execution that has led to continued great progress on the strategic priorities we have outlined on prior calls. I will discuss some of the key highlights since our update last quarter. First, I am pleased to report that we delivered even greater efficiencies in our logistics costs year-over-year than last quarter, contributing to our exceptional growth and profitability in the second quarter. Expressed as a percentage of net sales, selling and distribution expense decreased approximately 70 basis points year-over-year, and fulfillment expense decreased 15 basis points year-over-year. It was our first year-over-year decrease in fulfillment costs as a percentage of net sales in 2.5 years. I would like to acknowledge great execution by our operations team for driving these efficiencies in the U.S. and international markets. Shifting to the outlook for driving future efficiency gains. I'm thrilled to report that we are beginning to see early tangible benefits from the initiatives outlined on recent calls designed to reduce our return rates. As a proof point, our return rate declined year-over-year in the second quarter, representing the first year-over-year decline for any quarter in more than 3 years. The financial benefits of potentially reducing our return rate in the future are compelling, considering that for every 1-point decrease in our return rate, we'd expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs. Importantly, many of our efforts to reduce the return rate further elevate the customer experience, including by providing improved size guidance and leveraging technology and data for more personalized merchandising of products less likely to be returned. Second, we delivered strong results in expanding our international presence in the second quarter as net sales from international markets increased 13% year-over-year. Net sales increased across nearly all major regions, including China, where outstanding growth during the important 618 shopping festival in China led Revolve to be recognized as the second largest seller of fashion merchandise on Tmall Global. The 618 Festival is the second biggest event of the year in China for driving online sales, trailing only Singles Day in November. I'm also excited that we have recently launched a branded retail presence on the Douyin and RED e-commerce marketplaces that serve more than 750 million monthly active users on a combined basis. These incredibly popular platforms serve a young Gen Z demographic that skews female, a highly relevant audience for our fashion, beauty and lifestyle offerings. Third, we remain committed to efficiently investing to expand our brand awareness, growing our customer base and further strengthening our connection with the next-generation consumer. Our team delivered outstanding results in the second quarter across brand and performance marketing channels, leveraging the strength of our brands. For instance, the second quarter was our most efficient quarter for performance marketing investments in nearly 4 years based on our performance marketing investment calculated as a percentage of net sales. Michael will talk about important wins and brand marketing efficiency measures that are also a key contributor to the increased marketing efficiency reflected in our updated 2024 guidance for marketing investments. And lastly, we continue to leverage AI technology to drive growth and efficiency while further elevating the customer experience. A perfect example is our recent development and successful launch into production of an internally developed AI search algorithm on our FWRD site. For years, consumers have searched for products on our sites through a third-party search platform. With the emergence of AI and as part of our data-driven mindset, I challenged our team to develop and test our own AI search capabilities and test it against the incumbent retail search platform developed by a very large third-party technology company. It is incredibly impressive that our internal team of data scientists developed a solution that outperforms the third-party search technology, driving higher revenue per search and at a much lower operating cost. With this success, our internally developed AI search algorithm is now live on FWRD, and we are currently A/B testing the algorithm on our Revolve site with promising early results. To wrap up, we still have work to do, yet I feel great about the important progress we have made in the first half of the year. We began the third quarter of 2024 with solidly positive year-over-year growth in net sales for the month of July 2024, and there is momentum building across key growth and efficiency initiatives that we believe may further improve our foundation for profitable growth in the years to come. Thanks, Mike, and hello, everyone. I'm excited by the great progress we have made on our key priorities, especially the meaningful increased efficiency of our marketing investments year-over-year as we invest to build our brands and further strengthen our connection with the next-generation consumer. Our newly reimagined REVOLVE Festival in April set the tone for the second quarter by exceeding our expectations and generating a much greater impact on our key metrics within the 1-day format in 2024 than we had achieved over the entire weekend for last year's event. But we didn't stop there. We had an incredibly active and efficient second quarter for brand building, hosting a passel of events at Stagecoach Festival, the Formula One Grand Prix in Miami, the Met Gala in New York and at our retail store in Aspen, as well as in international locations, such as Mexico, Jamaica, St. Tropez and Sicily. Particularly exciting was a REVOLVE and FWRD Met Gala active party with rap brand fashionista Cardi B that generated nearly 3 billion press impressions in top publications, including Vogue, Elle, W Magazine, The New York Times, MSN, E! News and People. At the center of all the press attention was Cardi B's incredible dress at the afterparty that was custom-designed for her by our own brand team. Rave reviews in the press and on social media included Page 6 of the New York Post calling Cardi B's dress, a red-hot atelier REVOLVE number. Most exciting, in Cosmopolitan's ranking of the best Met Gala afterparty looks, Cardi B and our REVOLVE atelier dress ranked #1, at the very top of the list. Most impressive is that we were much more active in the second quarter of 2024 and delivered significantly increased marketing impact while spending millions of dollars less year-over-year. In fact, for the second quarter, year-over-year growth in our press and social media impressions accelerated meaningfully, even though we spent $7.5 million less in brand marketing than in the second quarter of 2023. Our impactful marketing efforts in the second quarter also helped to drive a reacceleration of active customer growth. Trailing 12-month active customers' increase by 26,000 during the second quarter was a tripled increase in active customers in the first quarter of 2024. Let's shift gears and talk about our recent acquisition of Alexandre Vauthier announced in June. We view the luxury industry challenges as an exciting opportunity to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e-commerce. So we have had our eye out for opportunities, and we took on an exciting transaction late in the second quarter with the acquisition of an 80% ownership stake in Alexandre Vauthier, an iconic luxury fashion idol that we have sold them for, for many years. Alexandre himself retains the other 20% ownership of the business and is equally excited to expand the partnership with the Revolve Group. Our team pursued a complex transaction in the depths of French bankruptcy courts, locking a compelling opportunity to acquire the Alexandre Vauthier business for a commitment to invest EUR 6 million over the next 3 years. I will share just a few reasons why the entire Alexandre Vauthier team are so excited about the combination. Alexandre Vauthier is 1 of only 15 haute couture brands in the world, with recognition that is incredibly important to luxury customers. To provide some context, the term haute couture is legally protected and can only be used by brands approved by the Federation of Haute Couture and Fashion, including Chanel, Christian Dior, Givenchy and Alexandre Vauthier. We expect REVOLVE and FWRD to benefit from the association with the revered luxury brand while giving us a direct line into the French fashion ecosystem to approximately 30 Alexandre Vauthier employees that are based in Paris. The brand marking impact that Revolve can deliver is an ideal complement to the Alexandre Vauthier brand that has just an incredible range of A-listers on red carpets, including Kendall Jenner, Rihanna, Beyonce, Taylor Swift, Selena Gomez, Katy Perry and Brigitte Macron, the First Lady of France. In close partnership with Alexandre, we intend to relaunch the Vauthier brand with a reimagined new collection in the fall, followed by a fashion show during Paris Couture Week in January 2025. Also compelling are the expected synergies from our e-commerce experience, data-driven merchandise experience and operational excellence to help grow the Alexandre Vauthier direct-to-consumer business, which has historically been very small. Our creative teams are already working hard in designing a new Alexandre Vauthier e-commerce site. With the Vauthier brand coming off a period of underinvestment, in the near term, we will understand what we need to invest ahead of the financial benefits we expect to realize in future years. In summary, there is a whole lot of work to do, yet we see a ton of opportunity to grow the brand on our platform through wholesale and other distribution channels in the years to come. We have also increased our organic investment in our luxury business. Capitalizing on the availability of outstanding talent, we have made a variety of strategic investments at FWRD that we believe can advance our pursuit of the vast number of effectively abandoned luxury customers that are up for grabs with all the recent industry disruption. As a case in point, 2 weeks ago, luxury e-commerce retailer Matches Fashion was shut down entirely, a business that in 2022 reportedly generated $460 million in revenue. Also important, the recent industry malaise has reinforced to brands that FWRD is an attractive partner due to our product curation, distinct styling point of view and incredible brand marketing engine that has attracted young luxury customers. I am pleased to share that Nike has recently committed to sell their full range of products on FWRD for the first time, building on Nike's success and long-standing partnership signed with Revolve. Now I will conclude with an update on our evaluation of the physical retail opportunity. I am excited to share that our key performance metrics, such as traffic, sales and customer engagement on our first permanent retail store in Aspen, continues to be encouraging. Summer has been a great selling season, further illustrating our potential of this new market opportunity. Our view, our early momentum in physical retail is impressive considering that we are still learning a great deal in the early stages of our retail journey. Mike and I have always believed that when a part of the business is performing as strongly as Aspen has so far, we want to invest into that opportunity in a much bigger way. Exploring retail expansion is especially fitting considering that most apparel sales still happen in physical stores. At the same time, we recognize that physical retail is a new and adjacent market opportunity for us that we haven't fully mastered. We have built an incredible brand that we believe can translate to physical retail. But before we move to quickly and to truly assess the long-term core potential, we need to first validate we can replicate the success in Aspen in other locations. To guide us through the next phase of our journey in testing physical retail beyond Aspen, we have engaged one of the most accomplished retail advisory firms in the market. Our partner has played a key role in retail expansion of some of the world's most respected consumer brands, including Apple, lululemon, Abercrombie & Fitch and Restoration Hardware. Their deep industry experience will help us navigate critical decisions on evaluation of potential markets, retail site selection, negotiation, architecture and store design. We are very excited to further explore and test launch of opportunity in physical retail. We should have an update on what comes next at our third quarter conference call in early November. To summarize, it feels great to see our team's hard work on growth and efficiency initiatives deliver results on the top and bottom line. With our powerful brands we have invested for more than 20 years, operational excellence and strong financial position, especially compared to our fashion e-commerce peers, we believe we are well positioned to pursue profitable growth and market share gains. Now I'll turn it over to Jesse for a discussion of the financials. Jesse Timmermans Thanks, Michael, and hello, everyone. I am very pleased with our second quarter, both from a financial standpoint and even more so by the progress made by the team on our operational initiatives that gives me increased confidence in our financial outlook moving forward. I will start by recapping our second quarter results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure for the balance of the year. Starting with the second quarter results. Net sales were $282 million, a year-over-year increase of 3%. The REVOLVE segment net sales increased 4%, and FWRD segment net sales decreased 4% year-over-year. In terms of geography, both territories returned to year-over-year growth in the second quarter. Domestic net sales increased 1% year-over-year, and international net sales increased 13% year-over-year. Active customers, which is a trailing 12-month measure, grew to 2.6 million, an increase of 5% year-over-year. Total orders placed were $2.3 million, flat with the prior year. Average order value, or AOV, increased 2% year-over-year to $306, benefiting from the higher mix of net sales at full price year-over-year. Another contributor to the improved year-over-year net sales growth was that our return rate decreased year-over-year in the second quarter, as the many initiatives designed to reduce our return rate in customer-friendly ways have begun to deliver visible results. Consolidated gross margin was 54%, an increase of 7 basis points year-over-year, driven by a year-over-year increase in our higher-margin REVOLVE segment. Let's move on to operating expenses, which was a true highlight that drove our meaningful operating leverage in the second quarter. Of note, we delivered better-than-expected operating expense efficiency across each of the 4 line items that we guide to each quarter. Fulfillment costs were 3.3% of net sales, around 10 basis points more favorable than our guidance, and a decrease of 15 basis points year-over-year. Selling and distribution costs were 17.9% of net sales, also better than expected by approximately 10 basis points and lower by 73 basis points year-over-year. This year-over-year decrease reflects the continued great work by our teams to drive efficiency in our logistics costs while also benefiting from the slight decrease in our return rate year-over-year. The biggest source of outperformance in the second quarter versus our guidance was marketing, which came in at 15.2% of net sales, significantly below our guidance of 17% of net sales. This represents a 360 basis point decrease year-over-year compared to our marketing investment of 18.8% of net sales in the second quarter of 2023. General and administrative costs were $33.5 million, around $500,000 lower than our outlook, which reflects a year-over-year increase that continued to outpace our net sales growth as we continue to invest in initiatives that support our long-term growth opportunities. Our tax rate was 26% in the second quarter, up slightly from 25% in the prior year and within our expected range. The increased net sales and gross profit year-over-year, the meaningfully improved marketing efficiency and the outstanding progress driving efficiencies in our logistics costs helped us drive impressive growth on the bottom line. Net income was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year. Moving on to the balance sheet and cash flow statements. Net cash used by operating activities was $25 million, and free cash flow was negative $27 million in the second quarter, primarily due to unfavorable working capital movements that more than offset the increased net income. For the 6-month year-to-date period in 2024, we generated positive operating and free cash flow, although lower year-over-year, primarily reflecting an increase in inventory investments to support a return to top line growth compared to a declining inventory balance in the first half of 2023 when we were very focused on rebalancing our inventory position. Inventory at June 30, 2024 was $234 million, an increase of 14% year-over-year. As of June 30, 2024, our balance sheet remained in a very strong position, with cash and cash equivalents of $245 million and no debt. The decrease in cash and cash equivalents year-over-year compared to June 30, 2023 primarily reflects positive cash flow from operations that was more than offset by our stock repurchases, exceeding $40 million in the last 4 quarters. Our strong financial position enabled us to execute on our capital allocation strategy in an effort to enhance shareholder value through: one, investing in the business to support the long-term growth opportunity ahead of us; two, opportunistically pursuing strategic M&A and partnerships; and three, returning capital through our stock repurchase program, where we repurchased approximately 119,000 Class A common shares at an average price of $15.83 during the quarter. Approximately $60 million remained under our $100 million stock repurchase program as of June 30, 2024. Now let me update you on some recent trends in the business since the second quarter ended and provide some direction on our cost structure to help in your modeling of the business for the third quarter and full year 2024. Starting from the top. Our return to positive year-over-year net sales growth has continued into the third quarter, with net sales in July 2024 increasing by a mid-single-digit percentage year-over-year, a sequential improvement compared to the year-over-year trends we reported for the second quarter of 2024. Shifting to gross margin. We expect gross margin in the third quarter of 2024 of between 52.3% and 52.5%, which implies an increase of approximately 70 basis points year-over-year at the midpoint of the range. For the full year 2024, we continue to expect gross margin to be between 52.5% and 53%. Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.4% for the third quarter of 2024, a decrease of approximately 20 basis points from the fulfillment efficiency ratio in the third quarter of 2023. For the full year 2024, we continue to expect fulfillment costs of between 3.3% and 3.5% of net sales. Selling and distribution. We expect selling and distribution costs as a percentage of net sales of approximately 18.3% for the third quarter of 2024, which implies a year-over-year improvement of approximately 70 basis points. For the full year 2024, we continue to expect selling and distribution costs to improve to a range of between 17.8% and 18% of net sales. I also want to note that our outlook for fulfillment costs and selling and distribution costs continues to assume a return rate that is flat year-over-year for the full year 2024, consistent with our expectation at the beginning of the year. We are optimistic that our great progress in the second quarter of 2024 in reducing the return rate year-over-year will continue, and the team is working hard to achieve it. However, since the improved return rate happened late in the second quarter, as encouraged as we are, I am not yet comfortable factoring in a lower return rate into our financial outlook until we can prove it out for a longer period. Marketing. We believe our strategies to drive impactful marketing campaigns at an increased level of efficiency will continue. We expect our marketing investment in the third quarter of 2024 to be approximately 15.2% of net sales, a decrease of approximately 20 basis points year-over-year. For the full year 2024, we now expect our marketing investment to represent between 15.3% and 15.5% of net sales, which is a decrease of 70 basis points from our prior full year 2024 guidance range for marketing investments. General and administrative. Offsetting some of the increased marketing efficiencies is our expectation for higher G&A costs than our prior full year guidance. We expect G&A expense of approximately $35.5 million in the third quarter. For modeling purposes, remember that our G&A expense in the third quarter of 2023 a year ago included a nonroutine accrual of $6.6 million for a then pending legal matter that we do not expect to reoccur this year. For the full year 2024, we now expect G&A expense of between $135 million to $138 million, which at the midpoint is an increase of $3.5 million from the high end of our prior G&A guidance range that we guided to on last quarter's earnings call. The majority of the G&A increase from our prior outlook is related to the Alexandre Vauthier acquisition completed late in the second quarter, including around 30 employees based in Paris and our investment to relaunch the Alexandre Vauthier brand and D2C website in the coming months. The remainder of the increase in our G&A outlook for the full year 2024 relates to increased investment in certain key areas where we see timely opportunities to invest today to even further increase our competitive position and drive future results, such as the forward investments that Michael discussed, and continued investment in AI technology, where we have already delivered meaningful growth and efficiency gains throughout the company. And lastly, we expect our effective tax rate to be around 24% to 26% in the third quarter and 25% to 26% for the full year 2024. To recap, I am very encouraged by our second quarter results, highlighted by the return to top line growth, operating discipline that drove a more than doubling of net income year-over-year, and driving the first year-over-year decrease in our return rate in more than 3 years. [Operator Instructions] Your first question today comes from the line of Rick Patel with Raymond James. Rick Patel Congrats on the great progress. I was hoping to get some additional color on second quarter results by month. And also, any additional color you can add to quarter-to-date trends as you think about the REVOLVE platform versus FWRD? And I'm curious if the KPIs that drove the second quarter results are the same ones that you're seeing drive a modest acceleration through July. Jesse Timmermans Yes. Thanks, Rick, and thanks for joining. This is Jesse. On the intra-quarter trends for Q2, if you remember last quarter, we said we were up in the low single-digit range through April, and we closed that plus 3. So I think, relatively consistent throughout the quarter with maybe a slight improvement as we progressed through the quarter, and then that continued into July. And then if you look at July, I'd say largely the same trend in July as you saw in Q2 with REVOLVE and international outperforming the domestic and FWRD businesses. But overall, really healthy and good progress, again, as we move through the quarter and then into July, and similar KPIs as well. Rick Patel Great. And on the return rate, it sounds like you're not baking in the progress that you saw late in the second quarter for the rest of the year. Does this reflect conservatism until you see a little bit more traction? Or is there something about maybe the seasonality of the business where returns usually tick up around holiday or certain other peak periods that would give you pause in incorporating that into updated guidance? Jesse Timmermans Yes. I think I wouldn't necessarily say that it bakes in conservatism. I think it trended well, but in the back half of the quarter, so we don't want to get too excited yet. There's great progress, but we want to see a little more traction before we bake that in. And I think we talked about the year-over-year decrease in return rate, but I think even more importantly is there is seasonality with return rate from Q1 to Q2. Q2 is certainly our highest return rate quarter of the year. And we saw Q1 to Q2 being flat. So just another data point to support that return rate in the second quarter. Your next question comes from the line of Michael Binetti with Evercore. Jesalyn Wong This is Jesalyn Wong on behalf of Michael Binetti. Just a little bit on the marketing costs. We lowered the full year guidance even though second quarter came in lower. And I know we alluded to higher efficiencies in the marketing. Should we be seeing this coming on efficiencies kind of flow through in the out-years? And then the other question would be on the active customers trend. How should we think about that heading into the second half of the year? Jesse Timmermans Yes. This is Jesse again. On the marketing, yes, we had a great quarter in terms of efficiency, and it's both on the brand marketing side, as Michael mentioned, investing $7.5 million less in REVOLVE Festival than we did last year and getting even better results. So that was the big driver in Q2, and we're continuing to see that efficiency on the brand marketing side in the back half of Q2 and into the back half of the year. But also important to note is that we did see efficiency on the performance marketing side as well. So that's what we baked into our guidance. If you look into the out-years, we'll continue to be opportunistic when it comes to marketing and kind of read the landscape. So not commenting too much more beyond that, but really happy with the efficiency this quarter. And then on active customers, it's great to see that active customer number holding at plus 5% and an incremental increase in the active customer count. As we have communicated on prior calls, we expected that growth rate to come down and approximate the net sales growth rate over time as we lap some of those higher customer growth periods of last year. So I think we'll continue to expect to see similar as we go into the back half of the year, but not a significant increase to that growth rate until we lap out of that Q1 2023 heavy markdown period that we were in that drove a lot of new customers. And I think on that customer point, also important to note that the growth came from full-price customers, which are very healthy customers, partially offset by lower-markdown customers, again, as we comp that Q1 2023 period. Your next question comes from the line of Dylan Carden with William Blair. Dylan Carden Just curious, any update on beauty, men's attachment rates or sort of how the business has been trending? And any help you can give on, I know it's early days, sort of timing of the retail strategy? I guess you just engaged the consultants, but is that, in your mind, something like a 2025 rollout? Or anything there would be helpful as well. Jesse Timmermans Yes, I'll start with the beauty and men's. Seeing great progress on both of those areas of the business, as we commented, a 25% growth on beauty, men's growing nicely as well. We're also seeing really great growth in the home product category, very small, but still really healthy growth there. So good progress. The team continues to execute, add new and exciting brands, especially on the beauty front. And then timing of retail, I think we mentioned on the prepared remarks, we have engaged the consultants. We are actively, I guess, pursuing, investigating, learning. But we want to caution that we are moving very, very pragmatically, learning as we go, and we'll have an update in our next quarterly call. Dylan Carden And I know you're probably not going to answer this one, but the brand strategy is sort of acquiring the acquisition that you made. I know you're being opportunistic, but is that something that if you kind of see those opportunities arose, you wouldn't balk at because maybe form some sort of stable of brands there? Michael Mente Yes. [Indiscernible] in the marketplace has really provided some unique opportunities here. We think that forever in our zone to our customer, strong design talent, unique design talent and brands that are aligning with that kind of our overall kind of brand ethos is important. So we're excited to come across this. And if we're able to come across other opportunities with similar-type profile and metrics, we wouldn't hesitate to pursue more. Your next question comes from the line of Mark Altschwager with Baird. Mark Altschwager I also wanted to follow up on the marketing. Significant upside to your plan there, significant change to the guide for the year. So I just want to better understand where you're seeing the efficiencies, what has changed in the landscape relative to a few months ago. I know you said you're pleased with REVOLVE Festival, but I guess the spend there was known at the time that you guided. And just any change to the underlying expectation on the top line that informs that guide for the year? Michael Mente Yes. I'll speak in particular to the brand marketing side where we saw great gains here, where a significant reduction in spend but actual outperformance compared to last year. And we really challenged the team to continue to evolve and to continue to get better. The landscape outside what we do on the brand side is a broad universe, but also it's -- a level below is a very diverse portfolio. So we've reallocated to certain zones and certain strategies that have been super, super effective and challenged the team to really do more with less. And they've proven they're extremely positive that they can do so. So we will continue to push that. But this will enable us to do at the appropriate time is really experiment with different tools, different strategies in the future. So there's a lot in the future that you'll see from us that is different and experimental and hopefully, very, very exciting and effective. And that will be coming at any time. We'll seek to drive greater efficiency, reduce spend, but continue performance by our internal metrics. Mike Karanikolas Yes. And certainly, on the digital or performance marketing side, we challenged the team to do more with less, and they delivered. That said, I'd say it's very landscape-dependent. And so sometime we'll see periods where we're able to get some nice efficiencies. There are also periods where the environment is a little bit more challenging. So I think it's difficult to say whether it's a trend that continues through the back half of the year, but we're very pleased with the results on the performance marketing side that we've seen thus far. Mark Altschwager And then, Jesse, on gross margin, historically, we've seen a bigger sequential uptick in REVOLVE segment Q2 versus Q1. That looks a bit more muted this year. Maybe unpack some of the puts and takes there and just any implications as we think about the back half of the year. Jesse Timmermans Yes. No significant implications as we look at the back half of the year. I think this year, different from years past. And of course, the last few years have been very abnormal with COVID, coming out of COVID, inventory correction, et cetera. But if you go back in time, there has been more of a seasonal impact there, but also a much different kind of skew on the full price markdown mix that was more consistent this Q1, Q2 than it has been in the past. Your next question comes from the line of Oliver Chen with TD Cowen. Oliver Chen As we look forward to Q4, the comparison toughens a little bit. What are some major catalysts for Q4 in terms of the potential to maintain that comp or improve? And any catalysts we should think about for back-to-school and holiday? Also, would love your view on the customer behavior. As you know, the macroeconomics, we've been seeing bifurcation and inflation pressure, but your growth continues to be really nice. So would love your thoughts on how the macros and the health of your customer is interplaying with what you're seeing. Mike Karanikolas Yes. So we feel really good about the trends we saw in the second quarter continued into Q3. And we know others out there have commented on some weakening of the customer and some macro pressures. Thankfully, it's not something we're seeing in our own data. How much that speaks to the macro environment versus us just executing well and gaining strength in the market, I think is too early to say. But we feel great about our own trends that we're seeing there. As we look at the back half of the year, I'll leave it to Jesse to go into any comp discussion, but we're focused on making our business the best it can be. We feel good about the trends, and we're hopeful that bodes well for H2. Jesse Timmermans Yes. Yes, nothing significant to add on the comps. You mentioned the comps do get slightly tougher. Holiday season, as you know, isn't as big for us as it is for others in terms of seasonality. So I know there's that tough shorter holiday season. But while it may have some impact, we don't expect a significant impact there. Back-to-school is a great season as well, but again, not over-indexing for us like it does others. So I would say nothing specific to call out. And then I think just all of the initiatives that the team has been working on through last year and into the first half of this year that continue to really take effect and you could see visibly in the results this quarter will continue to build. Oliver Chen Okay. Lastly, you've done a really good job like optimizing customer lifetime value with new brands that you've added, own brands with an older customer as well. What are your thoughts on your private label capabilities now? And which parts of your assortment do you feel like you have the most opportunity for further improvement? Michael Mente Yes. I think definitely, there's been a lot of work there. I think the broadening of the assortment over the past several years, the refinement is really -- that's also, as Mike mentioned, one of the many things that's continued to drive performance in a challenging environment, and we expect this to continue to drive growth in the future. Specific to owned brands, we've seen kind of the arc of expansion and contraction. And now we're in a phase of kind of a trough in ultimately, what we believe will be steady expansion over the near term and long term. I think this is -- part of it is the expansion outside of kind of our historic strength of dresses, which still remains very, very strong. Expansion to other categories are supposed to be seeing in the near term in terms of like kind of what we would view as more core essentials foundation product, which also can be stylized and be very cool, fashionable, but also very premium as well, the things that we know our customer is buying and shopping, but sometimes not always picking up us as the first place to go. So we'll be seeing -- putting energy in that space. We think there's also effort and energy and we can see in kind of the younger consumer as well. I mean that's an area that's yet to really be fully, fully nurtured. So we see a broadened roadmap to really enhance that owned brand experience over the last cycle of the customer as well as kind in all aspects of the closet, things that -- a lot of room to go on that zone. Your next question comes from the line of Matt Koranda with ROTH Capital. Matt Koranda Just can you put a finer point, Jesse, for us on the progression of third quarter last year? Remind us, I think you said comps get tougher, but I'm not sure if you were talking about fourth quarter or you were talking about the progression of the third quarter, so maybe August and September, if you could do that. Jesse Timmermans Yes. Yes, sure. Yes, I was more referencing the fourth quarter that gets a little tougher that Oliver was referencing. If we look at the third quarter last year, if you recall, we commented that July was down mid-single digits. We closed the quarter at minus 4%. So it's plus or minus in the zone where we're roughly even comps through the quarter. Matt Koranda Okay. Got you. And then just one on -- since a lot of others have been asked and answered, I was curious on the inventory balance. It looks up quite a bit more than sales year-over-year. So just wondering maybe if you could speak to the assortment and what we're positioning for. It sounds -- you guys sound pretty upbeat like we're going to see additional growth. And obviously, July was good. But it seems like they were preparing for some future growth. But maybe just if you could speak to the assortment, how we feel about it, health of inventory, that would be great. Mike Karanikolas Yes. So on the REVOLVE side, we feel very good about the health of the inventory. It is turning a tick slower than we would like to see, but we feel like the health is good. And the areas we're a little bit overinvested in are areas of lower markdown risk. Some room for optimization, but we think it's within the zone of a healthy turn that we're able to manage well. And it's something we have our eye on, but we feel good about the mix and the path going forward with the inventory. Jesse Timmermans Yes. And maybe just to add to that, Matt, the increase that we're seeing is primarily on the REVOLVE side, which, as you know, is much, much more in favor for us, easier to control and the assortment's great, like Mike said. FWRD, a few quarters ago and for the past several quarters, we've been commenting that we feel like around midyear, we'd be more back in check on the FWRD side. We've made great progress there. The differential on the inventory sales growth for FWRD is much tighter. And so I think essentially, they're on FWRD. Your next question comes from the line of Jay Sole with UBS. Jay Sole I'm wondering if you can elaborate a little bit on your comments you made about AI, about the internal search engine and also in the comments about elevating the customer experience that you mentioned in the press release. If you could talk a little bit about that, kind of where you see the company's ability to really use AI to improve the business going, that would be helpful. Mike Karanikolas Yes. So yes, we're really proud of the results with the internal search. And where it really excels, I think, is in things that traditional search struggled with, right? So it's less about finding specific attributes, although it's great at that, and more about understanding general aesthetics and broader concepts that traditional search struggles with. So -- and it wasn't just a small win too. It was a very resounding versus a very respected platform from the third-party company. So we're really pleased with those results. They look good on REVOLVE thus far also. And I think more broadly speaking, this sort of technology really opens up doors in terms of innovating in the customer experience, right, where it can be good at search, but the types of things it's good at lend themselves to much more broadly than search, just new ways of customers exploring and navigating the website and new sorts of features we can put together, some of which we have in kind of smaller portions of our customers, some initial tests and those types of things. But I think over the coming years, you're going to see that really evolve a lot. And our goal is to be at the forefront of that. Your next question comes from the line of Jim Duffy with Stifel. Peter McGoldrick This is Peter McGoldrick on for Jim. Jesse, can you break out the increase in G&A dollars in guidance between the Vauthier business and other investment areas? As we think about normalized G&A run rate going forward, is there any component that's a onetime cost related to the relaunch that should not recur? And then related to that, how should we be thinking about the contribution to the top line from the Vauthier brand? Jesse Timmermans Yes. Sure. So if you look at the back half of the year and that increase of $3.5 million, call it, I'd say about half is -- a little more than half is from Vauthier specifically. And then a meaningful portion of that remainder is due to the investments that we mentioned, still making investments in AI, making some really good investments on the FWRD side of the business. If you peel back the, call it, nonroutine and investment areas, G&A is in the kind of mid-single-digit-plus zone, so closer to in line with the sales growth. In terms of contribution from Vauthier on the top line, not until later this year, early next year, until we see some good movement there. As we mentioned, this is kind of restart, rebuild, build the website and launch the first collections there later this year into early next year. Peter McGoldrick Excellent. And then on international regions, you pointed to encouraging signs out of China. I was wondering if you break out contribution from other regions? Is anything standing out on a dollar contribution or growth rate basis? And how has international progressed quarter-to-date relative to the mid-single-digit growth overall? Mike Karanikolas Yes. So Q2 was a really strong quarter for international, both in terms of the absolute result and also just broadly speaking across regions. We saw nearly every region in the green internationally in Q2. And the standout regions continue to be some of the standout regions of past quarters. So Mexico, in particular, we continue to see really strong growth in. But we're really encouraged by regions like you noted in China, that we saw growth in China despite there being some headwinds there. We feel like we've made some good solid progress in China. As you know, a couple of quarters ago, we mentioned we were making a little bit more investments into that region. Obviously, there's a huge opportunity there. And so we started to see some impacts of those investments this quarter, and we're hopeful we'll see more of that in the quarters to come. Your next question comes from Sean Dunlop with Morningstar. Sean Dunlop I had one on the return rate initiatives. It looks like we shortened the return window on these AI fraud detection to sort of avoid wardrobing. Good to see the progress there. I guess I'm curious, has there been any discernible pushback from consumers? Have they reacted to that at all? I guess with us seeing a little bit less than one order per quarter on average, is that something we would have seen in period or something that we're sort of keeping an eye out in future quarters? Mike Karanikolas Yes. Great question. So through our own customer service channels, we haven't seen really any kind of pushback against the return policy change. And it's still a very generous, arguably industry-leading or certainly amongst the industry leaders in terms of the generousness of the return policy. So the return window was shortened to 30 days for cash credit, but actually 60 days for store credit. So consumers still have quite a long time to return items, and we're very friendly with customers if there's any kind of issue or exception. So we think it's been a very positive change. As we look at our own data, there's a whole host of things we've been working on with regards to returns. We think some of the impact in the second quarter may have been from that policy change, but we think a lot of the impact was through a number of these other areas that we've been working on, some of which started to exact earlier in the quarter, some of which are still in the early phases as we fine tune them and get them right. So we'll have to see how the year progresses, but we're hopeful, over time, we can continue to make a big impact there. Sean Dunlop Got it. That's helpful. And then just one more for me on repurchases. Looks like just $1.9 million there during the quarter. And I guess I'm just curious what plays into that capital return philosophy. With just a little bit less than $60 million remaining on the authorization, it seems like at current prices, that might be a pretty good investment. Jesse Timmermans Yes, yes. No, we think over the course of the last 4 quarters, it's been a great investment. And like you said, we still have $60 million there available. So we'll continue to be active. No comment on kind of when and how and at what price we buy, but I'm happy with the progress thus far. Your next question comes from the line of Ashley Owens with KeyBanc. Ashley Owens Just a quick one for me, maybe on FWRD, but also a little about the inventory progress there. Just any color on how return rates are looking? And then any insight on the gross margins there? Are we at the point of inflection yet? Or when should we start to expect to see that shift? Jesse Timmermans Yes. No specific comment on return rate specific to FWRD, I think just commenting on that overall. And to highlight, the return policy change that Michael was mentioning was made on REVOLVE only. We never shifted the FWRD return policy during COVID like we did on REVOLVE. So not an impact there on FWRD. In terms of margin, as I mentioned, we made great progress on the inventory balance. Markdown margin is still lower than where we want it to be, and that is showing up in the overall gross margin for FWRD with the goal of getting that back into the 40s over the kind of near to midterm. Your next question comes from the line of Ethan Saghi with BTIG. Ethan Saghi You got Ethan Saghi on for Janine. I just want to ask one quick one on owned brands. I was just wondering, as you guys are looking to start expanding that penetration again, if you have a target in mind of where you'd like that to get? And if so, what the time line would be to get there? Michael Mente No, we don't have a particular target when it comes to owned brand. I think the ultimate goal is just to get product -- get the best product in front of our consumer. I think for the portion of owned brand, we have to be that great. We see our -- even though our penetration is down from our peak, our per style metrics, our internal per style metrics are better than ever. So feeling incredibly great about that, so we comment about outstanding. But there is no long-term target. There is no -- there are modest improvement on the near term with how it can be for the near term. But also, we think that if we continue to do our job for years, I think there's no reason why we can't get to the penetration numbers of the times past. But of course, we think that this is far into the future. Your next question comes from the line of Janet Kloppenburg with JJK Research. Janet Kloppenburg Congratulations on [indiscernible]. I just had two quick questions, just getting back to the inventory. I think you said it was isolated to REVOLVE. Is that new categories or deeper investment in private label? Maybe help us understand the direction of inventory as we think about the end of the third quarter. And just lastly, as you think about July and your solid trends, any discernible change in spending on dress up versus casual or denim or anything like that, that you think you're well positioned for? Jesse Timmermans Yes. Sure, Janet. Thanks for the questions. On inventory, we expect to be kind of year-over-year increase in the same zone as we are in Q3 as we are today. No specific kind of categories or third-party versus owned brand dynamics to call out. But we feel good about the health of the inventory there. And again, being on REVOLVE, much more versatile, kind of in our control than on the FWRD side, so very manageable. And then no comments on any more specifics around the July trend, I think other than to say what we already said with REVOLVE and international continue to outpace the domestic and FWRD side of the business. That's all the time we have for questions today. I will turn the call back to management for closing remarks. Michael Mente Thank you, guys, for joining us on this quarterly earnings call. We're really proud of the results and the progress that we've made. Really, that has been broad based across a number of functions, the entire team performing at a very high level, but with a lot of work that's done. That foundation has been laid over many, many quarters before. We're excited for our continued progress ahead, knowing that this is a great product, but also knowing that there is a lot more coming to make a lot more opportunities indeed in front of us and beyond. We're quite prepared and excited for any turbulence ahead as we have been in times past, and looking forward to the dynamic landscape and looking forward to another quarterly -- another call with you guys very soon. This concludes today's conference call. You may now disconnect.

Reddit, Inc. (RDDT) Q2 2024 Earnings Call Transcript

Reddit, Inc. (NYSE:RDDT) Q2 2024 Results Conference Call August 6, 2024 5:00 PM ET Company Participants Jesse Rose - Head of Investor Relations Steve Huffman - Co-Founder & Chief Executive Officer Jen Wong - Chief Operating Officer Drew Vollero - Chief Financial Officer Conference Call Participants Doug Anmuth - JPMorgan Laura Martin - Needham & Company Ron Josey - Citi Brian Nowak - Morgan Stanley Eric Sheridan - Goldman Sachs Rich Greenfield - LightShed Andrew Boone - JMP Securities Tom Champion - Piper Sandler Daniel Salmon - New Street Research Benjamin Black - Deutsche Bank Alan Gould - Loop Capital Operator Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Reddit's Second Quarter 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 session. [Operator Instructions] Thank you. I would now like to turn the call over to Jesse Rose, Head of Investor Relations. Jesse, you may begin your conference. Jesse Rose Great. Thanks, Krista. Good afternoon, everyone. Welcome to Reddit's second quarter 2024 earnings conference call. Joining me today are Steve Huffman, Reddit's Co-Founder and CEO; Jen Wong, Reddit's COO; and Drew Vollero, Reddit's CFO. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements. Actual results may vary materially from those contemplated by these forward-looking statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. These forward-looking statements represent our outlook only as of the date of this call. We undertake no obligation to revise or update any forward-looking statements. During this call, we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP financial measures is set forth in our letter to shareholders. Our second quarter letter to shareholders and accompanying earnings press release are available on our Investor Relations website at investor.redditinc.com and investor relations subreddit, RDDT. And now I'll turn the call over to Steve. Steve Huffman Hi, everyone. Thank you for joining, and welcome to our second quarter earnings call. Q2 was another strong quarter for Reddit in our communities. We kept up our momentum with both strong business performance and progress on the product. In Q2, both users and revenue grew over 50% year-over-year. And for the second consecutive quarter, we had positive cash flow and we're profitable on an adjusted EBITDA basis. User growth has continued to climb, reaching new heights with over 342 million active users and more than 91 million daily active users. More and more people are coming to Reddit to explore their interests, engage in conversations and find their communities. And increasingly, users are turning to Reddit for answers to their questions via search, recognizing the authenticity and trustworthiness of our content across a wide variety of topics. Our product work is focused on enhancing the user experience to make Reddit faster, safer and easier to use. Conversations are the heart of Reddit, and we've improved our app with near instant comment loading and more intuitive navigation across different post types, including text, video and images. The recent improvements bring users into conversations faster and more often, driving more engagement on the platform. The number of comments viewed reached a new high, up 10% from Q1 to Q2. Over the years, we've hosted some notable Ask Me Anything sessions, ranging from U.S. presidents to celebrities and sports figures to regular people with interesting stories. We introduced several updates to the AMA feature, making it easier for a host to schedule and post and easier for users to participate. During the pilot, we've seen hundreds of new AMAs created, including those with high-profile brands and artists. These product updates tie into our advertising strategy, allowing us to test new conversation ad placements and AMA ads, which are high-intent services for brands and businesses to reach their audience. As the platform continues to scale, so does our need for safety and moderation tools. Using AI, we are reducing the moderation burden and making Reddit's platform safer at scale. We're evolving what the day-to-day looks like for moderators on Reddit, allowing them to spend more time engaging and growing their communities. International expansion remains a top priority and one of our largest opportunities. 50% of our current user base is outside of the U.S., and we believe we can scale this meaningfully over time. International growth was a key driver in Q2, both in users and revenue. International daily active users exceeded 45 million, growing 44% year-over-year and 11% from Q1. This was led by focus countries like France, India, the U.K. and the Philippines, where we're seeing good results with our growth strategies, including through machine translation. Immersive=machine translation is now widely available in French, and as a result, France was one of our fastest growing countries surpassing growth in the U.S. We will now begin to expand machine translation to German, Spanish and Portuguese, aiming to make Reddit accessible to everyone regardless of their native language. Looking ahead, we're making progress across our emerging initiatives, including the user economy, search and data licensing. Starting with the user economy. We're excited to have our developer platform out to public beta with a few hundred active developers. In Q2, we saw growing engagement with about 3x more custom post use than in Q1, including scoreboards and stock tickers in our international sports and investing communities. We're working towards enabling monetization within the developer platform to empower our users to create and earn money on the platform this year. I look forward to sharing more about this in the coming quarters. Okay. Next, let's discuss our opportunity in search. Reddit's content is uniquely valuable and becoming more important in the context of Internet search. Users run over 1 billion search queries a month on Reddit today, and our product work is improving the search experience and success rate on the platform. Later this year, we will begin testing new search result pages powered by AI to summarize and recommend content, helping users dive deeper into product shows, games and discover new communities on Reddit. Turning to third-party search. We're seeing an evolution in the search ecosystem where Internet search, summarization and training are blending. We are seeking the right balance between openness and protecting our users and platform. Our partnerships with Google and OpenAI align with our public content policies and uphold our belief in the connected Internet, helping people find what they're looking for and to discover communities on Reddit. Our preference is for Reddit it to be open and indexed in third-party search, and we are in discussions with both big and small search engines towards this end. However, some players in ecosystem have not been transparent with their use of Reddit's content. And in those instances, we've blocked access to protect Reddit content and user privacy. We believe the Internet and search are better with Reddit's content and we remain open to finding solutions that are mutually beneficial to our users, Reddit and the broader Internet community. To wrap up, I'm happy with the progress we've made in our first two quarters as a public company. We're still early in our journey with many opportunities and opportunities for execution ahead to fulfill our mission. Thank you again for being a part of this journey with us. And now, I'll hand it over to Jen. Jen Wong Okay. Thanks, Steve. Hello, everyone. Q2 was another strong quarter for revenue. Total revenue grew 54% year-over-year to $281.2 million and accelerated from the prior quarter and the fastest year-over-year growth rate since Q1 2022. The investments we made across the business continue to pay off, and we're pleased with the results in the first half of the year. The ad business continues to scale in Q2 and accelerated from the prior quarter as we executed on our strategies and saw a stable ad market. Ad revenue grew 41% year-over-year to $253.1 million. We made progress scaling and diversifying the business, expanding partnerships and executing on our AdTech road map. Let me discuss our ad revenue drivers. We saw double-digit year-over-year growth in impressions from personalized ad loads, underlying user growth and product enhancements to drive ad efficiency against a year-over-year decline in pricing. We continue to diversify our business across channels, verticals and geographies. The global scale channel, including mid-market and SMB grew over 50% year-over-year, driven by both new advertiser activation and by deepening existing relationships. Strength in our verticals was led by retail, pharma and financial services, which each grew over 50% year-over-year. International revenue accelerated from the prior quarter and grew 49% year-over-year, driven by strength across large and mid-market customers in EMEA. And the big six agency relationships were also growth drivers in the quarter. Our Q2 growth was across the full funnel. Performance objectives drove more than half of our revenue in the quarter and we more than doubled the number of clicks again as we continue to enhance the lower funnel capabilities of our full funnel advertising business. We made measurable progress against our AdTech road map in Q2. We focused on: number one, driving performance of our ad solutions; number two, improving usability for our advertisers and productivity for our sales force; and number three, offering our advertisers Reddit unique solutions and bringing them closer to our communities. Now let me discuss each. First, driving performance of our ad solutions. We continued building out our conversion API ecosystem with a new partnership with mParticle. This adds to our partnerships with Google Tag Manager and Tealium as we execute our one-to-many approach for CAP adoption. We launched a performance ad solution, Dynamic Product Ads or DPA, to public data. Early adopters have seen about a 2x higher return on ad spend, or ROAS, compared to other conversion campaigns. Now, it's still early for this solution, and we'll continue to invest in improving performance with this new solution. And we recently announced the acquisition of Memorable AI, which helps accelerate our road map to bring AI-driven intelligence tools and ad creative to our advertisers to help drive performance. With this acquisition, we're adding AI foundational models to our ad stack to help optimize creative, and we are working towards integration beginning to have impact next year. Second, improving usability for our users and productivity for our sales force. We've launched our Reddit ads API to GA, allowing partners and advertisers to integrate with Reddit's ad manager and build customized campaigns and analytics, which help to expand our platform's reach. Sprinklr is the first marketing intelligence platform to integrate with both Reddit's ads API and data API, offering advertisers unique insights and capabilities. In Q2, we extended our partnership with DoubleVerify and announced a new partnership with IAS to provide advertisers with brand safety and suitability measurement complementing our robust first-party brand safety controls and fostering transparency and trust with the major brands. Third, offering our advertisers ready unique solutions and bringing them closer to communities. We expanded ad placements on the conversation page, a high intent and valuable surface for both our users and advertisers and where nearly 50% of all screen views occur. We launched the test of ads between comments and a new refreshed set of ad formats for conversation ads that are driving higher click-through rates and early testing. Advertisers using both in feed and conversation ads experience a lift in action intent compared to those using old in-feed ads. We also invested in bringing new content types to our users and offering businesses and advertisers new ways to reach and engage with communities. In Q2, we launched the next-generation version of our Ask Me Anything, AMA product, resulting in hundreds of new AMAs created. Businesses are hosting AMA and promoting them with ads to engage with communities and to share more about their brands and products. We also announced a partnership program, which brings sports content to Reddit's ad communities, including highlight videos, AMAs and behind the scenes material. This helps drive engagement on the platform and offers new ad format and placements for our advertisers. Sports are global interest and a category that our users are deeply passing about with over 1,000 active sports communities on Reddit, partnering with Sports League was a natural place to start. And we'll see how this program unfolds later this year and consider how we might expand to other verticals and categories in the future. Next, I'll shift to our data licensing business. Other revenue grew over 690% year-over-year to $28.1 million, primarily driven by data licensing agreements signed in the first half of the year. This market is still evolving, and we are exploring agreements of partners across the landscape who are aligned with our public content and user privacy policies and where there is commercial alignment. Through recent partnerships with Sprinklr and OpenAI make Reddit's corpus of authentic conversations available for these partners to access, while also putting guardrails in place that protect our users' privacy and bred its content. To date, our data licensing strategy has focused on marketing intelligence platforms and large-scale enterprise technology and search company, and we made good progress addressing these markets. We'll continue to explore opportunities with new verticals and potential ways to work with additional large and smaller scale emerging AI companies. Overall, this was a good first half of the year for Reddit, and we've made a lot of progress. Our focus now turns to the back half of the year as we work to continue growing the business. Now I'll turn the call over to Drew. Drew Vollero Thank you, Jen, and good afternoon, everyone. Reddit delivered very strong second quarter results across the board, which built on the sound start in Q1 and rounded out a solid first half of the year. In the quarter, three key financial themes developed: first, our most important growth and cost metrics really shined; second, our profitability continues to inflect rapidly as our business scales; third, we saw continued traction on important economic drivers like cash flow, CapEx, dilution and stock-based compensation. Let's speak to each point starting first with strength and key metrics, specifically users, revenues, gross margins and OpEx. We saw really solid growth in the quarter with both user growth and revenue growth exceeding 50% year-over-year. The DAUq was $91.2 million, up 51%, logged out users were about 70% of the end quarter growth, but total logged-in users grew 31% year-over-year, the fastest rate in the last few years. Revenues were $281 million, up 54% as impression gains continue to fuel our growth. Ad revenue grew 41% in Q2, while other revenue grew over 690%, primarily driven by new licensing deals with Google, OpenAI and others. Margin growth also really shined in the quarter. Gross margins were nearly 90%, up from 84% in the prior year, driven by operating efficiencies, lower pricing from our cloud hosting contracts and the leverage from incremental revenues. For Q2, our 12% adjusted OpEx cost growth is very consistent with the last four quarters where adjusted OpEx growth has averaged about 9%. The Company continues to leverage the organizational scale it's built over the last few years as we targeted modest hiring in the front of house areas like AdTech, machine learning and sales. Total headcount was up less than 1% sequentially and 3% year-over-year. So, as you can see, terrific traction on key metrics. Second, let me touch on how profitability is inflecting rapidly as the business scales. On a GAAP basis, our net loss was $10 million, $31 million better than prior year and very solid progress against our internal goal of reaching GAAP breakeven. Q2 adjusted EBITDA was nearly $40 million, up $30 million sequentially and up $75 million year-over-year. Adjusted EBITDA margins reached the mid-double-digit level at 14% up from 4% in Q1 and negative 19% in the prior year. The key to our significant gains in profitability continue to be both execution and our strong economic model. Revenue grew over 5x as fast as total adjusted costs in Q2, similar to Q1 as revenues grew 54% year-over-year and total adjusted costs grew slightly less than 11% year-over-year. That's well ahead of our long-term internal goal of revenue growth twice as fast as total adjusted cost growth. Now relatedly, our incremental adjusted EBITDA margins were 76% for the quarter, slightly higher than our last four quarter average of 73%. In Q2, we saw a $75 million positive change in adjusted EBITDA on a $98 million change in revenue. Now to the third point, we're not only seeing good traction in areas like growth and costs, but also on important metrics like cash flow, CapEx, stock-based compensation and dilution. Operating cash flow was $28 million in Q2, an $82 million positive change from Q2 of 2023. For the first half of the year, positive operating cash flow was $60 million. Our CapEx remains very light, about $1 million in the second quarter, less than 1% of revenue. Stock-based compensation, including related taxes, was $67 million, down substantially from the last quarter due to the recognition of IPO-related stock expenses. Stock-based compensation was about 24% of revenue for the quarter. Share count movements were modest in Q2 as basic shares outstanding were $166 million, up 1% sequentially, but fully diluted shares were $205 million, down sequentially. On the other hand, cash was $1.7 billion, which gives us a lot of flexibility as our business scales into profitability and positive cash flow. In medium term, we believe the right amount of cash on hand for the business today is around $800 million to $1 billion. The Company will look to deploy capital where it makes sense over time with capital priorities being: first, investing in our business, M&A and share repurchases. As Jen mentioned, we recently completed and announced the acquisition of Memorable AI and ad creative optimization platform to help drive lower funnel performance for our advertisers. The preliminary purchase price consideration was $19.9 million, including $17.1 million of cash. The deal closed in late July and will be reflected in the Q3 financial statements. As we look ahead, we'll share our internal thoughts on revenue and adjusted EBITDA for the third quarter, where we have the greatest date of visibility. For the third quarter 2024, we estimate revenue in the range of $290 million to $310 million and adjusted EBITDA in the range of $40 million to $60 million. These estimates include the anticipated benefits from the recently signed content partnerships with the sports leagues. We anticipate these deals will contribute modestly to revenue this year, more in Q4 than Q3 and should have a greater financial impact in 2025 and beyond. So, to summarize, the strength and consistency of the numbers were nice to see throughout the first half of 2024. Both Q1 and Q2 were solid quarters for Reddit. That said, our business historically scales seasonally, and we've turned our attention and focus to the back half of 2024. Now let me turn the call over to Steve. Question-and-Answer Session A - Steve Huffman Thanks, Drew. Thanks, Jen. Okay. We're going to do two questions from our community, and then we'll open it up to everybody else. First question, in past interviews, you have mentioned using large language models to translate Reddit's content into other languages to better connect Reddit's communities internationally. Is this something that is being actively built or just a vision for a distant future. So, it's something that's being built. It's testing and for French, which was our first language for doing this, it's now in GA, or general availability, which means if you're -- in France, speaking French minus a small holdout group, you can see the full immersive real-time translation experience. And it's working very well. So now we're kicking off German, Spanish and Portuguese with our aim to get those out later this year as well. Long story short, the test was successful. This is a really promising feature. And so, it's real, and I think it should have an impact in the short term. Second question, I'll read and this one's for Jen. Advertising is the prime source of revenue for Reddit. To increase this revenue, do you plan to focus on increasing the quantity, number of ads, or quality, profit generated per ad, of ads featured on Reddit. Jen Wong Steve. So, what's important to growing revenue in our auction is that advertisers find the outcomes they want at the volumes and price they want. And our ads platform and marketplace is still early, still young. So, we do see opportunity to drive more demand and performance which can drive more value per ad or CPM, cost per thousand impressions. As load on Reddit, where there are ad today, like in the feed, for example, is light compared to peers. And the best we can tell outside in is about half of peer platforms. But there are still many places on Reddit without ads today. So, we're more focused on designing ads for spaces where users are spending more time versus increasing ad load in existing spaces. So, for example, 50% of screen views, they're now in conversation stages, that's an opportunity. Steve Huffman Okay. Thanks, Jen. For the community questions, Jen, Drew and I will record answers to the rest of them and post them tomorrow. Okay. Jesse, back to you. Jesse Rose Great. Thanks, Steve. Thanks, Jen. Krista, why don't we open up the line, take some questions from the folks that are on the line now. Appreciate it. Operator [Operator Instructions] Your first question comes from the line of Doug Anmuth from JPMorgan. Please go ahead. Doug Anmuth One for Drew and one for Steve. Drew, I was hoping you could provide some more color on the 3Q guide, in particular, any more insight into the ad market and the health in the third quarter. Just -- it looks like the revenue outlook is either very conservative or perhaps you're seeing something in the business because if you back out OpenAI incremental contribution and then perhaps even some of the sports league benefits as well. It doesn't suggest much sequential growth in revenue. So, I was just checking if there's anything to call out there. And then, Steve, you talked about testing new search results pages. Can you just elaborate there? Is this going to be done all internally? Or are you partnering with third-party providers here as well? Drew Vollero Okay. On the guide, Doug here, we guided 290 to 310. If you take the midpoint of that year-over-year growth is mid-40s. We think that's a good number. We think that's differentiated versus the pure set. If you look over the last four quarters, we've been growing in the mid- to high 30s. So, we feel like it's a differentiated number. I take your point that your measurement stake is a bit different. You're looking just only at the second quarter. So, I take your point there. In terms of the revenue drivers that you're looking at sort of the incrementality of them. Look, I think that the sports deals are something that's probably a bigger idea for us in 2025 and beyond. We have to get that sold through our sales force, et cetera. So, I would look for a very modest impact in Q3. I think we'll have a little bit more, particularly with the NFL in the fourth quarter. That's kind of the main part of the NFL season. So, I think that incrementality in the third quarter will be pretty modest. As it relates to kind of OpenAI, we saw about half the benefit of the deal in the second quarter. So, there will be a little bit of incrementality to your point. But overall, I think the guide feels good. Are there particular things that we're looking at in the third quarter that we can put our finger on? No, there isn't anything that's particularly different than what we've seen. Now for the full year, there still is some macro uncertainty and particularly in the fourth quarter around elections. So, I think that's a little bit in the background. But I think overall in the third quarter, I think the guide feels good to where the business is right now feels better than where we've been over the last four quarters. But I do take your point, it's a little bit lower than we've been in the second quarter, but I think we take a little broader lens than that. Steve Huffman Okay. Thanks, Doug. Second question about search. So, we're talking about on Reddit search. A lot of our work over the last couple of years has been on the back end. So improving the actual results, so the speed and relevance of those results. Some of that is on first-party technology. Some of that is third-party technology. We're also beginning to enhance the results with AI. Again, some of those are first-party models. Some of those will be third-party models. And what I was really referring to in my script is the rest of this year, we'll start to see the front-end product actually change, so the user experience and how we package these results because that's gone unchanged for a long time. Search on Reddit is a huge opportunity. Many new users run a search. You've heard me talk about onboarding, helping connect users to their interest on Reddit. For many users, they're literally typing into a box exactly what they're interested in. So it's, I think, really important consumer product service area. And then, of course, over the long term, there's significant advertising potential there as well. But really, what I'm referring to here is -- it will be our in-house efforts to improve the presentation of that product. Operator Your next question comes from the line of Laura Martin with Needham & Company. Please go ahead. Laura Martin I will be your request to only have one question. So, I'm going to ask one of Steve. Putting on your protector of culture hat, Steve, Historically, these are conversations and there hasn't been a hidden agenda about earning money. And you guys are going to try to earn money now for people and creators on the platform which sort of moves it more towards a Twitch or a YouTube in fine line. So, how do you protect this wonderful unique culture of Reddit? At the same time, you're going to let people make money from these conversations. Steve Huffman Thank you, Laura. Great question. So yes, I think one of the truly special and honestly, almost magical things about Reddit is the amount of time and effort people spend helping each other, giving advice, helping people through decisions sometimes small decisions, which should I watch tonight, sometimes big decisions like should I go through this breakup. It's really, I think, truly profound. Your question is if we start to include other incentives in there, like monetary incentives, does that change. In my experience on Reddit, whenever we add basically a new way of using Reddit, what happens is it expands Reddit, but we've not seen it cannibalize existing Reddit. And so, I think the existing altruistic-free version of Reddit will continue to exist and grow and thrive just the way it has. But now we will unlock the door for new use cases, new types of subreddits that can be built that may have exclusive content or private areas, things of that nature. A good example of this, for example is, at Reddit, we didn't host images back in the past. It was all text and links and images were linked. So, we'd link to other websites or platforms for images. When we added image hosting, all of a sudden, there's a ton of new communities built around that feature, but the existing text and link-based Reddit also continued to grow. So, I'd look at this as an opportunity of expansion as opposed to one that is going to cannibalize the existing Reddit, which as I said, is magical. It's something that we think is truly precious. And so, we'll, of course, watch these things closely, but that's how we see it playing out. Operator Your next question comes from the line of Ron Josey with Citi. Please go ahead. Ron Josey I wanted to ask on usage and in advertising. Steve, I think we saw logged in DAUs up 32%, maybe amongst the fastest growth in the past couple of years and we saw comments also, comments viewed, I think, up as well. So, I wanted to hear about the changes the team has made on the site itself, whether it be Shred-It, new onboarding processes that have driven this and really curious about the lasting implications here. And then, Jen, you mentioned the stable ad market. We saw each other a few weeks back over con. Can I just wanted to hear your conversations with advertisers have evolved really over the past few months just in terms of how the dynamic has changed in terms of advertising on Reddit. Steve Huffman Okay. Ron, thank you for the questions. Yes, as you observed, logs in DAU is up over 30% last year. That is indeed our fastest growth rate among that segment in years. So, we're very happy with that. And you answered your own question, improved onboarding, Shred-it, which represents web performance. I would say broadly a general push around quality on Red it has helped a lot. And then there is a structural change that we've been going through over the last couple of years, which is it used to be when you're a new user to Reddit, we were putting you into basically global feed. So we call that the popular feed today. That was the core Reddit product for the first maybe 15 years of our life. And now what happens is we get you into the community onboarding experience. And so, we try to find the interest specific to you. And then we put you in a home feed that has those communities in subreddit, and we grow from there. And so that first user experience has gotten much more dialed in and relevant to new users, which has been driving meaningful improvements to new user retention and of course, that compounds and the growth. And so, the story of it I think for a long time is we've had this very big top of funnel from third-party search and word of mouth. And the question has been, can we retain those users because we get so many shots on goal every day. So really, over the last year, we've gotten much better at retaining new users, and we've been growing over 1 million users a month more or less since spring of last year. Jen, there was a second question on the stable ad market. Jen Wong Yes. I think we saw a stable ad market in Q2, Ron. I'd say post can, I think -- first of all, I think can have very strong sentiment post. Can was working with Shred-It, it's a very, very positive. Look, we're watching a few things. We're watching inflation, geopolitics, elections. I will say a few things. One, there are real election jitters. We did see some pauses in the U.K. around the snap election, we saw pauses around the time of the Trump rally shooting. So, I think there's a lot of caution. I will also say that recently, agencies have signaled a little bit of back half caution budgets being more flattish versus growing. So, I think there is caution from the large holdcos, and we're not a big player in political ads, which some might have a political bump, but that's not something that we play in. That's kind of how I think about the back half. So overall, I think it is -- if there's still a little bit maybe more cautious but I think we're still well positioned. Operator Your next question comes from the line of Brian Nowak with Morgan Stanley. Please go ahead. Brian Nowak I want to go back to the ad markets, Jen. Can you talk to us about sort of what you're seeing on your branded advertiser spend? Are you still seeing your advertisers who are mostly branded spent? Are they spending more on the branded side? And so, sort of what's driving that -- then just sort of any update you can give us, I remember the pre-IPO. Walk us through sort of progress on growing your advertiser count, growing your advertiser spend, your advertiser spend per advertiser over time? Anything you kind of help us kind of what's going on actually beneath the headlines on driving this really strong ad growth in the 3Q. Jen Wong Sure. Happy to. So just on your question on the brand. Brand as an objective was growing really nicely for us. And in fact, I think brand, we've seen both folks come into the auction, so fitting against brand objectives as well as using our takeover product, which is a reserve product where they can align against specific subreddits, so specifically the category takeovers, you can buy category like sports, et cetera. So, we see brand advertisers come into both of those products as well as nice adoption of some of the Reddit unique formats like AMA that have been refreshed in the free format. So, brand has actually been solid as an objective, and there is really diversified spend across brand and performance. In terms of the underlying pieces of our business, I think it's really healthy in a number of ways. So, number one is we've been growing the number of active advertisers, particularly in the managed segment that has for large customers in mid-market and managed SMB. And those are really seeds for the future because you start small and you can grow those advertisers in some more products and more objectives. So that, I think, allows us to plant seeds for the future. The second is we had a number of growth drivers across our business. The scale part, mid-market and SMB growing over 50%, international becoming a growth driver, 49% year-over-year, vertical diversification. So, it used to be that our tech group was our number one vertical group. This quarter, it actually was the group that included retail, pharma, financial services, CPG, so really interesting. That diversification continues in our booking, it's actually changing the face of our book, I think, which has been really positive. And so -- and then the final thing I'll say is we've been investing in the lower funnel and specifically converging and that has accelerated in growth as an objective in our auction. So that's really nice to see because as that objective delivers more performance, that allows an unlock for more advertisers, particularly in the scale channel. So, I think the business is really healthy. We're doing a good job retaining at high rates or managed advertisers as well as adding new advertisers to the book because of the new platform capabilities. Operator Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan The topic really is Memorable AI. Can you talk a little bit about why you felt that was the right asset for you as a team to acquire? How you thought about building organically around that broader theme versus maybe accelerating the path to market and going down the acquisition route and how we should be thinking about that asset being integrated and having an impact on the business in the years ahead? Jen Wong Sure. So, one of the layers in our ad stack that we want to develop and that was on our road map is around creative, both insights and optimization and then creative generation. we know that, that can be really valuable for driving performance and also just making an easier, more automated, scalable experience for advertisers. It is something that we had on our road map that we could build, but acquiring Memorable, which is one of the leaders in the market, I mean, all of our deals just showed how much customers value their technology and insight it just accelerates our ability to come -- to add this part of the ad stack. So, we're integrating -- we get technology and talent with the acquisition, and we're doing that integration work in the back half of this year to start having impact next year, but it will really accelerate our ability to deliver performance at the lower end of the funnel, in particular. I mean it will help all the performance, but particularly at the lower end of the lower funnel where ad formats and creative can have a lot of impact on quicker rates and conversions. Operator Your next question comes from the line of Rich Greenfield with LightShed. Please go ahead. Rich Greenfield I got a couple of questions. Steve, you talked about sort of the improving engagement in sort of that upper funnel, which I assume you're talking about sort of how search drives people into the platform. But your DAU -- or your weekly users are still growing faster than your daily users. And I guess the question is how do you close that gap over time? Is it product changes? Like it's obviously great that you have all of these people coming and touching Reddit every single week. But how do you get them to be addicted and become daily active users? What is that -- like is there something that you've seen historically that sort of convert somebody from either a search-based user or someone who comes in once in a while to an actual daily user. And then just to, I wanted to follow up on, I think you've made a comment about CPM's pricing being down. Is that the same issue that you, sort of, are seeing in ARPU? Is it just simply that the users year-over-year are just growing too quickly and you can't keep up with the overall growth of the platform? Any just color on given how early you are, what's happening on the CPM side of pricing on the advertising side from Jen would be great. Steve Huffman Great. Okay. Rich, thanks. I'll take the first half. Jen will take the second half. So, look, let's -- first things first. We're happy with growth. Weekly is growing, daily is growing, logged in, logged out growing, so I think we're in a good position there. I think your observation is correct. Weeklys and of course, monthlys even more so, can be more volatile because they can be more affected by third-party search or events in the news and what have you. And of course, we want to grow dailys, and that's really how we operate the Company is growing dailys. But we don't think necessarily about how do we convert weekly to dailys. We think about it a little bit differently, which is how do we retain the dailys that we see on the platform every day. both the new users, getting them to come back at all and the core user is getting them to come back more. And our work there is -- it's hard work, but it's easy to explain. Relevancy, ML, onboarding product quality. Do you see something -- a very simple question? Do you see something in your first session on Reddit that is uniquely engaging? One assumption that I would caution against making is that search users, third-party search users, many of them are core users. So, they're using other search engines to effectively navigate Reddit, and I include myself in that cohort. But there are a number of logged out users or new potential users that come from search. And I think of that experience is there learning that Reddit, over time, has the answers to their questions. They may not be in that session looking to join a community. That's maybe a little bit of a heavier experience. But eventually, we get them through the front door. They'll come -- they'll download our app, but they'll come to the website. And then that's where everything I mentioned around relevancy and product quality come into play to retain those users. And we're growing retention and we're growing DAU. So, we're happy with that result. And then there's another interesting dynamic on Reddit, which is the longer somebody has their account, the more time they actually spend on Reddit. They join more communities and they go deeper and deeper. And so, users on Reddit where they maybe on other platforms age out, they actually age into Reddit and spend more time over the course of years. So I think this is a really powerful trend. Okay. Jen, the second half of the question was the interplay between users and ARPU and users in CPM. Jen Wong Sure. So, Richard, look, nobody manages in the Company of two. We managed revenue growth, we managed the DAU growth and we're in the, I think, fortunate position of having really strong revenue and user growth with users being a little bit more, and that's why ARPU is down. But I think when I look at the headroom that we have, I think we've been growing share in the top row around the revenue side and I think continue to have headroom on ARPU. So, I think it may be a first-class problem that we have in the map. On the CPM side, what's really driving the decline in CPMs is the placement on the conversation page. So that's a newer unit that -- and then -- and so the -- right now, we're still building demand for that unit. And there are a couple of things we're doing to do that. So one is educating the market about that unit. It's very unique. It's very different than anything else in the market. In fact, most people don't -- most platforms don't have an add-in comment, partially because the comments aren't the best part of their platform. They are the best part of Reddit, but there's some reeducation to be done. The second is that we've actually refreshed that format so that it has a broader set of creative capability. One of the things that our advertisers wanted is just a little more functionality in that format. So, we've recently released that, and they'll be able to take advantage of it. I think that can increase demand. And then finally, we're testing ad inside the comments. So that adds some more inventory to that page that there's very low demand for it because it's been testing. It's very new. It's just experimental. So obviously, that wouldn't have high CPMs in that unit yet. So when you look at the page, but I think I mentioned earlier that 50% of screen views are now on the conversation page. So the traffic is really going to that page, which is a great high intent, highly contextual page, but we have to match the demand through the flow of the ad impressions on that page. So we'll continue to grow the demand on this new unit. I think it's a really good unit high performing, but it will take time for the demand to catch up with the supply that's been generated. That's why you see the differential in CPMs. Operator Your next question comes from the line of Andrew Boone with JMP Securities. Please go ahead. Andrew Boone You guys have seen an influx of new users just via search as well as just an improved product. Steve, you mentioned this earlier about the maturation of new user cohorts and how people spend more time. Are you seeing anything different with new users more recently? And then, Jen, retail is just a massive opportunity. Can you talk about DPAs and what you guys need to do to unlock the retail advertising opportunity more acutely? Steve Huffman Okay. Thanks, Andrew. Me first then Jen. Okay. So, the question was, are we seeing anything in the latest cohort of new users. Broadly, we're seeing new user retention go up. That's one of our core internal operating metrics. And I think that's really a measurement of is onboarding working, is the performance ML relevance, all of those things working and so we've actually seen over the last couple of quarters, steady improvement in news or retention, which we're very happy with. In my experience at Reddit, that is the hardest number to move because you can't always see it in an individual experiment. So, you have to kind of let these product improvements run for a while. But our strategy of just make Reddit better, simpler, faster, safer, easier to use, that's been working for the last year. So happy with the new user retention, particularly among that new cohort. Jen, the question was about the retail opportunity on Reddit. Jen Wong Yes, I think the question is about DPA. Look, I think this is a really big opportunity given the commercial intent on Reddit. But it's also one of the hardest, right, in the industry. Dynamic product ads, they have their -- it's its own objective, it has its own models and prediction models and it has its own end-to-end workflow from ingesting catalogs all the way to how measurement is done at a detailed level to feedback product level information for the targeting and retargeting. So, it is a big ecosystem onto itself. So, what we're working on is; one, improving our models and we're driving performance; number two, CAPI, so conversion API, incredibly important for signal and feeding signal into the models for better and better performance; third is enabling first-party data from an advertiser to match into our platform for targeting; and then, obviously, on the measurement side, they have very specific audiences, maybe loyalty programs for some cases, like retail media networks that they want to be able to target against; and then finally, just continuing to improve both the format and the catalog in jet. So, we can adjust catalogs today, but we want to make that process easier and even more scalable. So, we are working across all of these areas to continue to improve DPA. I would just say it is -- our goal for this year is to test with a handful of partners and really build the foundations of DPA so that it can be a more material contributor to the business in '25 and beyond. It is a longer road, but I think a big opportunity. Operator Your next question comes from the line of Tom Champion with Piper Sandler. Please go ahead. Tom Champion Steve, you've talked in the past about the most reliable way to grow is to make Reddit better. So, I'm just curious between sports content, subreddits functionality search, text translation, the laundry list of things you guys are working on. What do you think has the potential to be the most impactful from a customer experience perspective? Steve Huffman Thanks, Tom. Good question. I'd say there are broadly two -- two dimensions to this or kind of two ways I think about it. So the first is like the general quality. And so this is, call it, the search experience onboarding ease of use. In mature markets like the U.S. is actually still one of our fastest-growing markets. Product quality has an outsized impact because the content is already there. If you speak English, if you live in America, I guarantee you have a home on Reddit. Your interest, your passion, whatever you're into are going through is on Reddit somewhere. And so the question is can we reveal that? And so anything we do around onboarding and relevance more effectively reveals that. And so that's driving a lot of the growth in the U.S. Now outside of the U.S., we need the content base to grow. So, machine translation is one of the best opportunities we've ever seen to rapidly grow the content base outside of English. So, I've mentioned this over the last couple of quarters, our tests in French. That went very well. We're expanding to other languages. So, I think this is a very exciting opportunity. Now of course, all of the quality and onboarding efforts that works -- that will work in every market, but you have to have the content base, the community base to recommend people too. And so that's where the machine translation is really affected. So to summarize, in the U.S., it's the block and tackle product quality work. And outside of the U.S., it's the machine translation to get them to the point where the quality can be like a multiplier effect on top of that. Operator Your next question comes from the Daniel Salmon from New Street Research. Please go ahead. Daniel Salmon Steve, you talked a lot about search and third-party search and the relationship with model training and thus your data licensing business. You also talked about beginning to restrict access to Reddit content in some cases. we have seen news reports that, that includes Microsoft Bing. I'm sure you don't want to speak too much in detail about one potential partner. But is that an example of the type of back and forth that's beginning to transpire with some of your potential partners? Or just more broadly, can you take us a layer deeper in those conversations and tell us a little bit more about the variables that tend to be the more important ones in those dialogues. Steve Huffman Sure. Thanks, Dan. So look, the corpus of content on Reddit is super valuable. The old status quo, so search engines crawl us index that's put us in search. Everybody wins in that. The consumer finds content, we get some users, the search businesses grow. Reddit in that arrow is the most open. By the way, I think Reddit is still the most open of our peers. But what's changed is folks are calling Reddit for training and other use cases that we can't see. And so, we can no longer assume intent for what Reddit's data is being used for. And so, we went from a situation of being default open to default blocking crawlers. Now we're still open for users. You don't even have to have an account to see Reddit. And we still make our corporates available for free for noncommercial use our preference is for Reddit content to be out there, to be open and indexed, but it has to come with important terms. And so -- we created a public content policy we released that a couple of months ago. And it basically speaks to user privacy, not using Reddit data to identify users or target ads to them, you can't resell the data because, again, we want to know where Reddit data is going and what it's being used for. And so those are the terms of engagement. Now we've had some big players sign up for that. We've had some medium and small players sign up for that as well. And we still make Reddit available for free for researchers and noncommercial use. But the ecosystem has changed. I'd say it's a dynamic market for sure. All of our conversations are ongoing. Look, I think, as I said many times, our preference is to have relationships with everybody, but we need to be very considered of where Reddit data goes and what it's used for. Operator Your next question comes from the line of Benjamin Black with Deutsche Bank. Please go ahead. Benjamin Black So, on the developer platform, so opening it up to monetization is coming earlier than we anticipated. So -- can you talk a little bit more about the results from the public data and what surprised you to the upside for instance? And then Drew, quickly on margins, the flow-through was, I think, 76% the last couple of quarters, the midpoint of 3Q guide implies a bit of a step down. Is there some comparative built in? Or maybe just more broadly, talk to the swing factors embedded in your EBITDA guide. Steve Huffman Okay. Yes. Thanks, Ben. First question on debt platform. So the beta is going nicely. So we are in closed beta for most of this year. We're still iterating on the technology. It's one of the more complex things we've built because we're effectively running user code both on our servers and on the client side. That's in a public beta now. We've got a few hundred developers playing with it. There's some cool stuff in the works. So, I'm excited to see where users take it. Our aim for this year is to both get some of these debt platform apps kind of at scale out there. We see some fun ones of scoreboard, stock tickers and Wall Street bets, things like that. I'd love -- I'd be very excited to see some of these more interactive ones, and I'll be very, very excited to see somebody build something that we didn't anticipate, which is kind of a common story of Reddit is users surprising us. So, one milestone we're looking for is that surprise. And then the other milestone we're looking for is just to connect the dots on monetization. And so really getting an end-to-end prototype where a user can basically buy something through a developer platform app written by another user. So, I can't promise scale or anything like that this year. But getting to that kind of end-to-end proof of concept will be, I think, a really important milestone. But we're making nice progress towards that. Drew, the second question was about margin and flow-through Q3. Drew Vollero Yes. Look, it's really been a good run for us last four quarters, as you mentioned, 73%, 76% last quarter. Look, there's nothing enormous going on. There's a couple of things on the margin the guide itself sort of has, I think, an incremental margin in more of the 60s range, there's a couple of things in between that are happening. I mean, I think, again, incremental revenues are our friends. The guide is a little higher than where we were in in the second quarter, 281. So, we'll pick up something there, which is nice. I think there's a couple of things to think about as you think about our margin structure. But again, just small stuff on the margin, a nice benefit that we got over the last 12 months has been contract prices on hosting. And so, we signed those contracts in kind of mid-third quarter last year. We've enjoyed kind of a full year of those benefits you remember. Our gross margins were up 500 basis points in the second quarter. We'll start to lap that contract pricing now here in the third quarter. So that will be a little bit of a -- we won't see the benefit that we have seen over the last four quarters on that. Again, a couple of other small things in the margin. The Company pays raises typically in the third quarter. So, there'll be a little bit more on the cost structure there, again, on the margin, small stuff. And then also we hire a bit more in the third quarter. Historically, we have a lot of folks that come in, the folks that we've hired from universities typically start during that time. So, it's a little bit on the margin again. So, nothing huge. Maybe a couple of points lower we'll see sort of you can do the math around kind of what the guide margin is. But overall, there's nothing significant in the quarter. There's a little bit also in the model for business translation, right? So, we're starting to translate, as Steve said, some of the markets into foreign languages, there's some hosting costs associated with that as well. So those are things, but no huge change right now in the margin structure. Operator Our final question today comes from Alan Gould with Loop Capital. Please go ahead. Alan Gould I've got two. First, what impact as Olympics and political historically had for you on users' engagement. I'm assuming not much on revenue? And the second one for Drew, is that cash guide that you were a cash goal of $800 million to $1 billion is significantly less than what you have now. I'm assuming that's a multiyear period to get to that. Steve Huffman Okay. Thanks, Alan. First question, maybe Jen and I will tag team that real-quick. So, there are certainly moments in the world that are huge, right? Olympics, elections, major sporting events like the Super Bowl has been a big one on Reddit. What we've seen -- and we've seen this for a long time, is there's always some subreddit on Reddit that's having a moment, that's twice as large as they were yesterday or sometimes significantly more. But when you zoom out, our traffic doesn't fluctuate that much because there are many thousands of subreddits, and so somebody is always having a moment, somebody is always growing, but our traffic is actually pretty steady despite kind of feeling that activity on the Internet or even feeling it on Reddit. Jen, is there anything to add from a kind of revenue point of view around these events? Jen Wong No, we don't say in critical ad, so there's not a bump from that, not a focus for us and something like Olympics, I think tracks to see what you just said, which is there's always these moments happening on Reddit, but overall, they kind of smooth out, and that's how it reflects in the revenue. Those are opportunities -- sales opportunities, but they tend to smooth out because there's moments happening in different parts of Reddit throughout the year. Steve Huffman Okay. And the final question with Drew. Drew Vollero Yes. On the cash side, you're right, Alan. Thanks for the question. $800 billion is how we think about things over the medium term. We wanted to dimensionalize the cash that we have on the balance sheet right now at $1.7 billion. I gave you a sense on kind of the cash flow over the last couple of quarters, which has been positive and nice. So, the cash is starting to build. We also wanted to give you a sense on how we think about the priorities here. The first priority will be and continues to be investing in the business. There aren't huge ideas right now from a capital investment perspective. And so, we're also starting to look at M&A. You saw us tuck in Memorable in the quarter. So, there's money available for that. And then sort of we'll start to think about share repurchases as we move forward as well. So those are sort of the capital priorities. I think of $800 million to $1 billion is sort of how we look at our business from a stress test perspective. We think that's the right amount of cash. Obviously, we have a credit facility behind it, too. So, I think the Company has a lot of capitalization and certainly has the liquidity to do what it wants, but I wanted to start to dimensionalize a little bit for you how we think about what cash might be available for things like M&A and share repurchases in the future. Jesse Rose Great. Thanks, Krista. Thanks, everyone, for joining. We look forward to keeping the dialogue open. Take care. Steve Huffman Appreciate it, folks. See you. Operator And this concludes today's conference call. Thank you for your participation, and you may now disconnect.