Reddit's Cost Leverage: Separating R&D, Stock Compensation and Compute Spending

A Hacker News reader asked in July 2024 what Reddit was spending over $800 million a year on. That was a figure in a historical question, not a verified current annual cost. The latest quarter needs consistent accounting: FMP reports about $231.3 million R&D and $271.6 million combined selling, general and administrative expense, producing approximately $502.9 million GAAP OpEx. Adding about $70.3 million cost of revenue gives approximately $573.2 million total costs and expenses. Management's $462 million adjusted total costs and expenses and $392 million adjusted OpEx are separate measures. SBC already enters the relevant GAAP lines and must not be added again. Multiplying one adjusted quarter by four does not establish actual annual spending.

R&D was an important expense at about 28.7% of quarterly revenue. The call described investments in machine learning, performance and safety, ad targeting and consumer products, but did not reconcile every project to R&D or cost of revenue. R&D includes different personnel and development inputs. Its full $231.3 million cannot be treated as an AI-model compute bill or used to isolate data-licensing profit.

Combined SG&A was about 33.7% of revenue and includes selling, marketing and administrative activities. Management discussed brand and acquisition investment and said marketing spending was slightly higher sequentially as a percentage of revenue. This helps explain spending priorities; a larger budget is not measured marketing ROI or realized customer value. Advertiser growth, actual revenue, acquisition spending and expense intensity need to be assessed together.

The CFO reported $392 million adjusted OpEx, approximately 49% of revenue versus 57% a year earlier: about eight percentage points of improvement in the company's reported measure. A different measure, adjusted total costs and expenses including adjusted cost of revenue, was $462 million and grew 39% year-over-year while revenue grew 61%. Those scopes must not be mixed. The adjusted measure removes SBC and other company-defined adjustments, so current SBC-recognition timing alone does not explain this adjusted year-over-year improvement.

FMP's six-quarter window gives a concrete example of expense leverage. From Q1 2025 to Q2 2026, R&D rose from about $191.3 million to $231.3 million, approximately 20.9%, while revenue rose from about $392.4 million to $804.9 million, approximately 105.1%. R&D/revenue declined from about 48.7% to 28.7%. Revenue actually grew faster within this window. The comparison does not independently identify an algorithm's contribution, prove an unchanged engineering team's productivity or guarantee that the growth gap persists indefinitely.

Expense leverage is not uniform. SG&A/revenue rose from about 32.7% in Q1 2026 to 33.7% in Q2. That observation is consistent with management's discussion of increased marketing investment, but alone establishes neither future deterioration nor persistent improvement. Overall operating leverage needs separate, comparable changes in R&D, SG&A, cost of revenue and revenue; one declining ratio is not the entire cost structure.

Using unrounded FMP amounts, GAAP OpEx/revenue declined from approximately 63.95% in Q1 2026 to 62.48% in Q2, about 1.47 percentage points. Company-wide cash-flow-statement SBC rose from about $68.3 million to $101.0 million, but it does not all belong to OpEx. Subtracting that entire difference from OpEx cannot establish a measured pure timing effect. The table's total SBC ratio and GAAP OpEx ratio must be read separately, not added together.

The CFO reported $107 million SBC and related taxes in Q2 and attributed the sequential increase primarily to annual-grant timing. FMP's approximately $101.0 million cash-flow-statement SBC differs in scope from the measure including related taxes. On July 30, 2026, management guided Q3 SBC and related taxes to $140-155 million. That was then-current guidance, not actual Q3 expense, and the expected movement cannot all be attributed to a single recognition-timing factor.

Removing SBC from an adjusted ratio helps describe another operating measure; it does not remove the economic cost of equity compensation. SBC is noncash and is added back in the operating-cash-flow reconciliation, but it can affect per-share ownership. Shareholder outcomes also require comparable actual issuance, dilution, repurchases and repurchase prices. Better adjusted metrics do not establish that equity compensation is immaterial or that dilution has been fully offset.

Quarterly CapEx was approximately $1.134 million, about 0.14% of revenue. That measures reported capital expenditure for this quarter, not an inventory of owned assets, lease obligations or all compute-procurement arrangements. Cloud-hosting costs can be expensed. Low CapEx proves neither virtually no infrastructure ownership nor that all AI compute is in cost of revenue. The materials provide no separately verifiable AI/ML compute-cost line.

FMP reports approximately $70.3 million cost of revenue, up about 53% year-over-year. Management reported 61% revenue growth and 91.3% gross margin, up approximately 50 basis points. Its explanation was that incremental revenue and hosting-efficiency programs offset increased compute usage, including AI and ML. The observed results are changes in consolidated cost of revenue and margin. Total COGS growth is not standalone AI-inference-cost growth, and one period's offsets do not establish inevitable future margin pressure.

The CEO described larger recommendation models, faster refresh and broader signals as upgrade opportunities. These are product and development plans, not a quantified cost budget. Higher usage, lower unit-compute cost, hosting efficiency and ad monetization can move together. Without those volume and price data, model upgrades cannot be converted directly into future expenses or profit. The investment question is how these factors jointly change the total cost required per unit of revenue.

Quarterly operating cash flow was approximately $261.9 million, more than twice the approximately $111.3 million a year earlier. Free cash flow, defined here as operating cash flow minus CapEx, was approximately $260.7 million or 32.4% of revenue. This is an actual cash-performance improvement. FCF is neither net income nor entirely distributable shareholder cash; operating cash flow still reflects noncash SBC add-backs and working-capital timing. Management's statement that trailing-twelve-month OCF exceeded $1 billion also retains its rolling-period scope.

FMP reports approximately $234.6 million quarterly repurchase spending, compared with management's rounded $235 million statement. A buyback is a financing cash outflow, not OpEx. Ending cash and short-term investments of approximately $2.79 billion are a balance-sheet position. Repurchases actually used cash; whether they created per-share value depends on purchase price, actual share reduction, concurrent issuance and business value. Repurchase amounts or cash balances alone do not establish that outcome.

The current answer to the historical spending question is that Reddit realized expense leverage and operating-cash-flow growth within this window, with identifiable R&D and SG&A spending. The limits are specific: current improvement cannot simply be extrapolated into a durable advantage, consolidated data does not isolate AI data-licensing profit, and model upgrades are not a proven cause of future margin decline. Subsequent actual revenue, GAAP-to-adjusted differences, SBC and net share movements, hosting efficiency and cash conversion should test the judgment. July's Q3 guidance is not realized performance.