Reddit flags volatile search referrals as US user growth slows

Reddit said on Thursday that choppy search-engine traffic ‌affected U.S. user growth in the second quarter, overshadowing an upbeat revenue forecast and sending its shares down about 12% in extended trading.

The social media company operates in a highly competitive market. Bigger rival Meta through its Threads communities hub and new Forum app for Facebook Groups users appears to be directly targeting Reddit’s core community model.

“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.

Reddit’s user growth is shifting toward international markets that generate less revenue than the U.S. The company reported average revenue per user of $11.85 in the U.S., compared with $2.26 internationally.

Daily active unique visitors in the U.S. rose 6% in the second quarter, down from 7% in the prior quarter, while international DAUq ‌jumped 28%.

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.

The company’s AI-powered tools that enable enhanced campaign performance by offering a library of successful ads, generating Reddit-specific ad copy and ⁠community-based targeting within subreddit discussions have helped attract advertisers.

Reddit’s second-quarter revenue rose 61% to $805 million, beating estimates of $730.4 million.

The company expects third-quarter adjusted earnings before interest, taxes, depreciation and amortization of $385 million to $395 million, above estimates of $369 million.