RDDT reported its Q2 2025 results on 31Jul. The stock priced surged going into earnings and then popped even higher after the results became public. My next portfolio update won’t be posted until the end of August, so I decided to share my thoughts on RDDT and the recent quarter now.
In my last portfolio update, I spelled out my reasons for owning RDDT and described RDDT as the position in my portfolio that I would most likely increase. Those reasons were strongly reinforced in RDDT’s Q2 FY2025 earnings result. The financial results were spectacular. Revenue growth accelerated to 77.7% y/y. The advertising business, which comprises 93% of RDDT’s revenue, grew even faster at 84% y/y. Operating expenses (non-GAAP) only grew by 35.3% y/y. That’s operating leverage at work! However, the operating leverage would have been even better had RDDT not added a recent new marketing effort; RDDT’s sales and marketing expense grew 69% y/y, and 70% of the new headcount added in the quarter was for consumer-facing areas like sales, marketing, and ad tech. RDDT is investing heavily on initiatives to make RDDT better, and these investments should payoff in the form of added future advertising revenue growth. Gross margins held above 90%, operating margin (non-GAAP) was 33.4%, and FCF margin was 22.2%. CapEx spending was $505 thousand! In the same quarter, AMZN spent $32.2 billion on CapEx; that’s almost 64,000 times more than RDDT. Adjusting for AMZN’s 80x larger market cap, RDDT is spending about 1/800th on CapEx (proportionally). RDDT is one asset light business. RDDT’s biggest expense is on its human capital: employees. These expenses show up in the operating expenses, which again grew 33.4% (non-GAAP). Share based compensation was about $95M for the quarter (about 19% of revenue), but share dilution was minimal at 0.3% sequentially and 0.8% y/y.
The other key performance indicators were also strong. ARPU jumped 47.1% y/y with US ARPU growing 59.3% y/y and international ARPU growing 39.5% y/y. Weekly average users grew 21.6% y/y. Daily average users grew by a similar amount. If RDDT can keep growing both ARPU and its user base, they have a good recipe for strong revenue growth.
I think RDDT will continue to be a great investment just for the advertising business. The value proposition for advertisers, the growth of the ad business, and the multiple improvements that RDDT continues to make to retain and attract advertisers will all serve to drive continued growth. Most of the growth in the quarter came from existing advertisers expanding their spend on RDDT advertising, but RDDT also expanded their active advertiser count by more than 50%. All of this bodes well for continued strong growth for RDDT in the quarters to come.
While I expect RDDT to be a great investment just for its advertising revenue and business, the licensing opportunity with companies developing LLMs brings additional upside. Licensing revenue grew 24% y/y in Q2 but only 3.3% sequentially. In fact, licensing revenue hasn’t increased significantly during the past three quarters, but the potential remains because RDDT’s user generated content, if it’s as valuable to AI as I think it could be, has the potential to be monetized to a much greater degree than has been the case so far. Despite the recent share price surge of more than 100% from the April lows, I’m happy to continue holding all of my shares.
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