How did Reddit's expense structure evolve in 2024?

Reddit's expense structure evolved significantly in 2024, marked by strategic shifts that not only improved operational efficiencies but also supported the company's rapid growth and profitability.

1. Capital Expenditure (Capex): Reddit's capex remained relatively low, less than 1% of revenue. This was due to the company's use of third-party infrastructure partners, which eliminated the need for significant capital investments. This approach allowed Reddit to maintain high incremental margins and a capital-efficient business model.
2. Gross Margin Improvement: Reddit's gross margin improved by 280 basis points to 90.1% in Q3 2024, compared to the previous year. This was driven by operating efficiencies, low pricing, and increasing revenues. The gross margin was further bolstered by the company's data licensing agreements, such as with Google and OpenAI, which significantly increased other revenues.
3. Selling, General, and Administrative (SG&A) Expenses: There was a notable surge in SG&A expenses, rising from $40.8 million in the year-ago quarter to $243.5 million. This increase was primarily due to stock-based compensation, which totaled $595.5 million when included in the GAAP calculation. Despite this, the company's adjusted EBITDA remained positive at $94.1 million, indicating strong operational performance.
4. Free Cash Flow and Operating Cash Flow: Reddit reported positive operating cash flow of $71.6 million and free cash flow of $70.3 million. These figures reflected the company's efficient cash management and ability to generate surplus cash after capital expenditures.
5. Employee Share Settlement: Reddit invested $66 million to net settle 1.2 million employee shares. This move not only aligned employee interests with shareholder value but also reinforced the company's commitment to transparency and good corporate governance.

In summary, Reddit's expense structure in 2024 was characterized by prudent capital spending, improved gross margins, increased investment in SG&A areas (primarily stock-based compensation), and strong cash flow generation. These factors collectively contributed to the company's financial health and profitability.