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Reddit delivered another quarter of robust financial growth, beating Wall Street's expectations on both revenue and earnings. However, the social media platform cautioned investors that fluctuations in search engine referrals, particularly from Google, are weighing on user growth in the US, raising fresh concerns about its long-term traffic strategy.
The company reported second-quarter revenue of $805 million, a 61% year-over-year increase that comfortably surpassed analysts' estimates. Despite the strong financial performance and an upbeat outlook for the next quarter, Reddit shares fell about 12% in after-hours trading as investors focused on slowing domestic user growth.
Reddit said changes in search engine algorithms have made referral traffic increasingly unpredictable, particularly in the United States. Chief Operating Officer Jen Wong described search referrals as "volatile," noting that updates to search ranking systems continue to affect how new users discover Reddit through external search engines.
COO Jen Wong told Reuters that "SEO headwinds" caused by changes in search algorithms "more than offset" the company's efforts in terms of user acquisition in the quarter. Still, product improvements are helping convert lower-engagement visitors from search engines into loyal app users, she said.
Reddit also forecast slower revenue growth in the third quarter. However, the forecast range of $860 million to $870 million was above LSEG-compiled analysts' average estimate of $829.1 million.
"The company's advertiser growth in the second quarter was 70% year-over-year. So, we continue to onboard a lot more new advertisers onto Reddit," Wong said.
She added the growth was particularly strong among mid-market and small- and medium-sized businesses and international advertisers.
Executives said Reddit is working to convert more casual search visitors into logged-in app users through product improvements and better user experiences, reducing its dependence on external search traffic over time.
While search referrals remain inconsistent, Reddit's investment in artificial intelligence is paying off in its advertising business. The company has expanded AI-powered tools that help brands create campaigns, generate ad copy, and target audiences based on conversations within subreddit communities.
"Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter, but the bigger picture is unchanged: the commercial business is strong," Co-founder and CEO Steve Huffman said in a letter to shareholders.
AI overviews have yet to make a similar level of positive impact as traditional "10 blue links", Huffman said on the company's post-earnings call.
These features have attracted a growing number of advertisers, particularly small and medium-sized businesses as well as international brands. The platform's advertising business remained the primary growth engine during the quarter, helping Reddit outperform revenue expectations.
For the third quarter, Reddit expects revenue between $860 million and $870 million, well above market forecasts, while adjusted EBITDA is projected to reach $385 million to $395 million. The strong guidance suggests the company remains confident about advertising demand despite broader macroeconomic uncertainty.
Also Read: How to Use Reddit: A Beginner's Guide to Subreddits, Feeds, Communities
With the increase in adoption of AI-assisted search tools like Google’s AI summary service, the issue of whether or not users will keep clicking to source websites is becoming an issue that publishers like Reddit are dealing with.
Despite the advantages of licensing the information to the AI firms and expanding globally, the experts have reservations about Reddit’s capability of maintaining its user acquisition with an unpredictable pattern of search referral. Reddit is convinced that it is hard to completely replace its community discussions and genuine user-generated content with AI summary.
In the future, the plan of Reddit is to concentrate on user engagement, expand advertisers’ base, and improve products while dealing with the challenges posed by AI-assisted internet environment.
