Reddit plans to require all users to create official accounts to access the social media platform, marking a major departure for the site known as “the front page of the internet.”
The company revealed the change Thursday as part of its third-quarter earnings, in which it beat on the top and bottom lines, but provided weak fourth-quarter sales guidance. The company’s shares dropped over 15% after its numbers were released.
Here’s how the company did compared with LSEG estimates:
- Earnings per share: $1.40 vs. $1.35 expected
- Revenue: $895 million vs. $878 million expected
Reddit CEO Steve Huffman told CNBC in an interview that the company’s shrinking search-referral traffic from Google played a major role in its planned efforts to require people to become “logged-in” users.
A previous Google search update designed to surface “authentic” content from internet forums helped Reddit grow its user base over the past few years, but the search giant’s continued push on AI overviews and related chatting features has negatively impacted referral traffic.
“I think fundamentally that relationship between Google and the rest of the internet is evolving, and so for us, this means a continued focus on our core users that come to Reddit directly,” Huffman said.
Previous Google algorithm changes would “kind of come and go,” Huffman said, but the company’s AI efforts represent “a fundamental shift in how the Google product works, from being a traffic driver to whatever’s going on now.”
Huffman didn’t provide any specific timing on when Reddit plans for the platform registration change, saying only that implementing it through the site would involve a lot of complexity. The company will begin testing in the fourth quarter outside of the U.S.
He said that Reddit is still determining what parts of the service logged-out users will be able to see, and will iron out the details as part of its upcoming testing.
Reddit said that daily active uniques, or DAUq, rose 12% year-over-year to 130.3 million in the third quarter, trailing Wall Street estimates of 133.7 million. U.S.-specific DAUq dropped 2% year-over-year to 50.7 million, which was below analyst projections of 53.5 million.
Huffman said that “search referral traffic is down meaningfully in this quarter” and that the trend will continue in the fourth quarter.
He said that Reddit is continuing its effort to make its platform “a daily habit” for users. “So that’s where our focus is: growing those app users and logged-in users,” Huffman said.
Reddit, which derives the bulk of its overall sales from online advertising, is able to monetize logged-ln users better than logged-out users, because those registered users are more active and valuable to advertisers itching to deliver more targeted ads.
“The vast majority of our revenue comes from our app users and logged-in users are direct traffic, and both of those are up Q. over Q. and so that’s where our focus is,” Huffman said.
The company’s third-quarter sales grew 53% year-over-year, marking an end to the eight-straight quarters of revenue growth eclipsing 60% that it reported in July as part of its second-quarter earnings.
Reddit said that fourth-quarter sales will come in a range of $1 billion to $1.03 billion, which was below Wall Street estimates of $1.05 billion.
“It’s still a strong guide,” Huffman said about its revenue guidance. “We are still growing at an industry leading rate, and that’s despite the headwinds from search referrals.”
Reddit’s third-quarter average revenue per user, or ARPU, came in at $6.87, which was higher than the $6.50 that analysts were expecting.
The company’s “other revenue” segment, which includes its data-licensing business, jumped 35% year-over-year to $48 million in the third quarter. Reddit’s two biggest data-licensing partners are OpenAI and Google.
Huffman said that Reddit remains “in negotiations” with Google over its data-licensing agreement, and said that it is “only going to do a deal that makes sense for Reddit,” if it chooses to continue the partnership.
“I think there’s a lot of strategic considerations that goes into that,” Huffman said.
Huffman called the required registration plan a “big change” for himself, considering he “grew up on the open Internet.”
“Reddit is the last platform to provide basically unfettered logged-out access, and that’s largely because of me, I’ve been holding that line,” Huffman, a Reddit co-founder, said. “I think users will probably go through the same understanding that I have, which is that it’s a sign of the times. It’s an evolution of how these platforms work.”
Huffman later expanded on the significance of AI’s impact on Reddit’s user growth in an earnings call with analysts, and explained that the company plans to continue spending on marketing efforts intended to offset search-referral declines.
“This is a consequential time for Reddit, and this period does remind me of about 11 years ago when I came back to the company,” Huffman told analysts, referring to when he rejoined Reddit in 2015 following it’s then-chief Ellen Pao stepping down. “We had a lot of conversations then about what is Reddit and what is Reddit for, and what is our place in this ecosystem. And we’ve been having those conversations at Reddit recently.”
“Reddit’s mission is to create community and belonging for everyone in the world, and while there’s overlap between Reddit and other players in the ecosystem, whether we’re talking about social media or AI search, fundamentally, Reddit is communities and conversations,” Huffman said.
