Ibotta Inc
NYSE:IBTA
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Greetings, and welcome to the Ibotta's Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to your host, Shalin Patel, Vice President of Investor Relations. Thank you, Shalin. You may begin.
Good afternoon, and welcome to Ibotta's Q3 2024 Earnings Conference Call. With us today are: Bryan Leach, Founder and CEO; and Sunit Patel, CFO.
Today's press release and this call may contain forward-looking statements, including our guidance for Q4 2024, implementation of our Instacart relationship and the potential impact of our product development efforts that are subject to inherent risks, uncertainties and changes and reflect our current expectations and information currently available to us, and our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings.
In addition, our discussion today will include references to certain supplemental non-GAAP financial measures. They should be considered in addition to and not as a substitute for our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's earnings press release, which is available on our Investor Relations website at investors.ibotta.com.
Also, during the call today, we'll be referring to the slide deck posted on our website. Unless otherwise noted, revenue and adjusted EBITDA comparisons to prior periods are provided on a year-over-year basis. Lastly, references to non-GAAP revenue growth reflect the exclusion of onetime breakage revenue benefits in 2023. This is due to an update we made in 2023 to fix the software error to correctly charge maintenance fees to inactive direct-to-consumer redeemers, which resulted in a short-term benefit to GAAP revenue last year. Please see Slide 24 in the appendix for more detail.
With that, I'll turn it over to Bryan.
Good afternoon, everyone. Thank you for joining us to discuss our third quarter results. We delivered revenue and adjusted EBITDA above the high end of the guidance range we provided on our second quarter earnings call. We are making progress in increasing the value we deliver to our 3 key constituencies: Consumers, Publishers and Clients. The total number of redeemers on the IPN continues to grow at a rapid pace, increasing 63% year-over-year and 12% sequentially from the second quarter. We successfully rolled out our digital offers on Schnucks' properties in the third quarter, setting a new company record for shortest time to deploy. Subsequent to the quarter, we also successfully integrated our offers with their electronic shelf labels, providing a glimpse into the future of in-store shopping and offer redemption, which I will cover briefly later in my remarks.
We also deployed our digital offers on Instacart as part of a testing phase and expect offers to be available to 100% of Instacart customers by the end of the year. Overall, our redemption revenue grew 32% year-over-year on a non-GAAP basis, evidence of the traction we saw with our CPG brand clients. I'll dive into all 3 of these areas in more detail:
First, regarding consumers. The IPN is continuing to reach more and more consumers, setting a new record for redeemers at 15.3 million in Q3. Our redeemers redeem more than 6x per quarter on average, resulting in nearly 100 million total redemptions in the third quarter, exceeding the record we previously set in Q4 of last year. According to a Bank of America Institute report published last month, approximately half of all Americans describe themselves as living paycheck-to-paycheck, while nearly 1/3 of consumers are, in fact, spending 90% of their income on necessities. Both of these metrics have consistently trended up as compared to pre-COVID for all household income cohorts.
While necessity is clearly a strong driver prompting consumers to seek value, even those consumers who are in relatively better financial health are impacted by higher prices. While the rate of inflation has slowed according to the Bureau of Labor Statistics, food at home prices are still up 27% over the last 5 years, outpacing overall CPI. Once the consumer is lost to another brand or to private label, the cost to reacquire them is very high, which suggests that brands are almost always better off using promotions to retain price-sensitive consumers than letting them churn. We're expanding the surface area of our network and growing savings opportunities for consumers by making it easier to find and use our offers on our existing publishers, adding new publishers and onboarding new CPG brand partners, while at the same time deepening the offer budgets we have with our existing partners.
Moving to Publishers. I'm very proud of our teams for fully launching Schnucks and deploying Instacart in a test phase. I'm also grateful to these publishers for being such excellent partners throughout the implementation process. Our rollout of Schnucks took less than 90 days, which set a new record for time to market with a new publisher. This highlights our growing efficiency in helping bring publishers onto the network even when they're switching from another provider as was the case here. Our partnership with Schnucks is focused not only on increasing savings available to their shoppers, but also on innovation related to in-store technologies, such as our recent integration of Ibotta offers with their Electronic Shelf Labels or ESLs.
Now at all 115 Schnucks locations, consumers can quickly and easily see which products have an associated Ibotta offer and scan a digital QR code to unlock that offer. We're excited to experiment with new ways of intercepting consumers in the aisle where the majority of purchase intent arises as this opens up new vistas for CPG brand marketers and should increase redemption rates for our offers, particularly in-store.
As it relates to Instacart, we are still in the initial testing and piloting stage, and we're working to have our offers rolled out to all Instacart customers by the end of the year. With all publisher rollouts, we anticipate a gradual ramp in revenue over the first 12 months of our offers being live.
First, the implementation of certain technical capabilities and marketing best practices generally occurs in phases with some of the most important components becoming live within 180 days after the full launch.
Second, in order to expedite initial launch, we often withhold certain types of offers such as Beer, Wine & Spirits offers until after the launch of grocery offers. Until now, Beer, Wine & Spirits offers have only been a small category for us as they've only been available on our D2C properties. But we expect these offers to become available to multiple publishers in the coming quarters, and we regard the addition of Instacart as an important catalyst to this category.
Finally, when a publisher has an existing digital offers business that we are taking over, either from the publisher themselves or another third-party provider, there is a gradual transition process to migrate over hundreds of customers to our own sales teams and self-service platform, and this transition can take some time to finalize.
With regard to our existing publishers, we've been pleased with our progress in growing redeemers and redemptions as well as making progress on our joint punch list items. Initiatives we have successfully tackled include implementing UX enhancements, including offer-led clipping, implementing a new offer recommender that has lifted redemption activity and gaining access to shopper marketing offers at one of our publishers in the dollar channel. We expect to see continued progress along these lines in 2025.
Now let's turn to our CPG clients. This year, we've seen a 65% increase in gross billings in our CPG redemption business year-to-date. This is the result of a lot of hard work by our sellers and account managers who've worked with our CPG clients to rapidly step up their investments in our fast-growing network. In many cases, when a new marketing channel is expected to scale rapidly, CPG brands take a wait-and-see approach, meaning they prefer to see that scale demonstrated before they allocate budgets large enough to take advantage of that scale. This can create temporary imbalances between the supply and demand for offers. This year, with our network capacity growing by such a large percentage relative to the prior year, our sellers have often found themselves sourcing incremental budgets midway through the year before the next planning cycle has come around. During the third quarter, we were successful in doing just that, unlocking major investments from several CPG brands that have previously invested only lightly on our platform.
Within our existing clients, some of our biggest year-over-year increases have occurred in laundry, pet food, yogurt, snacks, cleaning supplies and protein, among others. In addition, some of our biggest category wins outside of groceries include general merchandise such as toys, household essentials, office supplies and pet supplies. We continue to make progress in these areas with general merchandise redemption revenue as a percent of total redemption revenue almost doubling as compared to the same quarter last year and increasing sequentially as well. We also began to see greater investments from private label brands at a handful of leading retailers, reflecting their recognition that the IPN can be a useful platform for growing their market share. We anticipate that trend will continue, further increasing the need for national brands to participate in their categories.
As we look out on to 2025, there are several exciting initiatives on our road map. These are designed to do 3 things: one, improve the rigor and credibility of our measurement framework, allowing our clients to track how many incremental sales they are delivering in near real time; two, increase the efficiency of our campaigns by delivering the right offer to the right consumer at the right time; three, making it easier for our clients to do business with us. Based on early feedback from some of our largest clients, we are optimistic that these innovations will continue to help us attract more dollars from annual promotions budgets as these budgets are reset in the strategic planning processes and break out of the promotions category, allowing us to earn more continuous investments from larger national marketing budgets. By doing these things, we believe we can improve our ability to keep up with the growth in redeemer demand that shows no signs of abating.
Let's start with measurement. It's clear that brands desire a more rigorous way to measure the return on investment of their advertising spend. Ibotta's unique data set allows us to measure incremental sales, meaning sales compared to a baseline of what would have occurred without a live promotion. This helps us evaluate the true lifetime value of a campaign in relation to its fully burdened cost. In 2025, for the first time, our clients will have the ability to see in near real time exactly how many incremental sales their campaigns are delivering and the predicted cost per incremental unit sold or cost per incremental dollar achieved. Instead of relying on lagging indicators of how certain forms of marketing spend are performing, now brand managers will be able to see exactly how hard their marketing dollars are working, set scale and efficiency goals and see the immediate results of their sales figures. This kind of measurement represents a major breakthrough, not just for the promotions category, but for the CPG industry more broadly.
Turning to the efficiency or ROI of our campaign. We're leaning further into our targeting capabilities with an ambitious plan to upgrade how promotional campaigns operate. By moving beyond one-size-fits-all promotions toward promotions that can be tailored based on the observed purchase behaviors of each consumer, we can dramatically reduce unnecessary subsidization and deliver more incremental sales. Lastly, in terms of making us easier to work with, I'd like to highlight the recent beta launch of our new campaign manager tool during the fourth quarter. Our campaign manager tool streamlines offer setup and allows us to focus more time on selling. While some clients will always want white glove service, plenty of others, particularly in the long tail of emerging brands, will prefer a self-serve model. Campaign Manager is available to a limited number of clients today and will be rolled out broadly in 2025.
I'd now like to briefly address some of the dynamics we've seen in our business more recently. As you can see from our Q3 results, we had a very strong end to the third quarter, moving through CPG promotional budgets faster than anticipated. As we look at the current quarter, however, despite it being our seasonally strongest quarter in the past, the rapid growth in our redeemer base, coupled with intense demand for savings on everyday items has caused us to exhaust 2024 budgets faster than anticipated. This has put short-term downward pressure on our redemption revenue in Q4, resulting in our guidance. We believe this downward pressure is temporary because we continue to see extremely high rates of client retention, indicating our clients are happy with the quality of what we are delivering. We have received indications from many of our top clients that they intend to increase their investment levels as their annual budgets reset in 2025.
As Instacart rolls out, we believe we will benefit from e-commerce-specific budgets to supplement the offer supply. And the macro environment for CPG in 2025 will continue to favor marketing channels that can demonstrate that they deliver incremental sales at scale at lower cost in a way that can be measured with precision and in near real time. Over time, we will continue to lead a paradigm shift in this industry away from fixed annual promotions budgets and toward a way of buying smarter promotions on our network, much the same way brands buy ads on the Trade Desk or on the walled garden sites today.
To wrap up, we believe our initiatives to add new publishers on the IPN, implement best practices with our existing publishers, improve our targeting and measurement and increase automation and self-service capabilities to meet our clients' strategic and tactical objectives all support our runway for growth. While we are dealing with what we believe to be near-term supply constraints, we are confident that we are taking the right steps to alleviate them and accelerate revenue growth.
With that, I'll hand the call over to Sunit to discuss our third quarter results and fourth quarter guidance. Sunit?
Thank you, Bryan, and good afternoon, everyone. We delivered strong revenue, adjusted EBITDA and free cash flow growth with revenue and adjusted EBITDA 5% and 22% above the midpoint of the guidance range we provided on our second quarter earnings call, respectively. We are pleased with our free cash flow of $36.7 million in the quarter, which brings our year-to-date free cash flow generation to $86.3 million. We saw healthy growth in third-party redeemers across the IPN on both a year-over-year and quarter-over-quarter basis, highlighting the unique and growing scale that we bring to our CPG clients.
Revenue in the third quarter was $98.6 million, representing non-GAAP revenue growth of 19% year-over-year, exclusive of $2.1 million in onetime breakage revenue in the prior year period. We delivered Q3 adjusted EBITDA of $36.5 million, representing an adjusted EBITDA margin of 37%. Adjusting for the $2.1 million in onetime breakage revenue last year, this compares to 26% in Q3 of 2023 and implies 66% adjusted EBITDA growth. In Q3, redemption revenue comprised 86% of our total revenue with ad products and other comprising the balance of 14%. This compares to 77% in Q3 of last year. 3PP redemption revenue comprised 52% of total revenue with D2C redemption revenue representing 34%. This compares to 27% and 50% for 3PP and DTC non-GAAP redemption revenue, respectively, in the third quarter of 2023.
In Q3, our redemption revenue was $84.5 million, up 32% year-over-year on a non-GAAP basis. Our total redeemer and redemption growth continues to be strong, and we continue to see very strong growth in our third-party publisher business, partially offset by softer performance in our D2C segment. Third-party publisher redemption revenue was $51.3 million, up 129% year-over-year, while D2C redemption revenue was $33.1 million, down 20% on a non-GAAP basis, excluding the onetime breakage benefit in Q3 of last year.
Ad and other revenues, now 14% of our revenue, were $14.1 million, which is similar to the first 2 quarters of the year and down 27% year-over-year. We continue to see CPG brands reallocate their dollars toward fee-per-sale promotions on our network at the expense of nonperformance-based banner ads on our mobile app, which is evident in the strength of our redemption revenue.
Turning to our key performance metrics. Total redeemers were 15.3 million in the quarter, up 63% year-over-year, driven by the rollout of Ibotta-powered manufacturer offers on Walmart to all U.S. Walmart customers with the walmart.com account towards the end of the third quarter of 2023, the subsequent growth of Walmart's audience, Dollar General launching in July 2023 and Family Dollar launching in April 2024. Redemptions per redeemer was 6.4, down 12% year-over-year, driven by the growth in third-party redeemers, which have significantly lower redemption frequency as compared to our D2C redeemers.
Redemption revenue per redemption was $0.87, down 7% year-over-year on a non-GAAP basis, primarily reflecting the mix shift towards third-party redemptions, but also some negative mix shift within our CPG portfolio. This was partially mitigated by the growing contribution from higher MSRP general merchandise and like-for-like price increases. As a reminder, redemption revenue per redemption can vary quarter-to-quarter based on seasonal patterns, but also due to variations in offer mix.
Turning to third-party publishers. Redemption revenue was up 129% year-over-year. Redeemers were $13.4 million in the quarter, up 85% year-over-year. Redeemers continue to grow on a quarterly basis due to the natural growth within our existing publisher base, but also due to seasonal drivers such as back-to-school. Redemptions per redeemer were up 20% as compared to the prior period to 4.9. Redemption revenue per redemption was $0.78, so up 4% year-over-year.
Turning to our D2C business. D2C redemption revenue was down 20% year-over-year on a non-GAAP basis, excluding last year's onetime breakage revenue benefit and up 3% sequentially. D2C redeemers were 1.9 million, down 10% year-over-year, while redemptions per redeemer were 16.5, down 8% year-over-year, leading to a decline in total D2C redemptions. Our D2C redemption revenue per redemption was $1.05, a decrease of 5% year-over-year, excluding last year's onetime breakage revenue benefit.
A combination of strong revenue growth and operating leverage resulted in an adjusted EBITDA above our guidance range. We generated $36.5 million of adjusted EBITDA, which represented an adjusted EBITDA margin of 37%. Q3 non-GAAP gross margin was 88%. Adjusting for the onetime breakage revenue benefit in Q3 of 2023, non-GAAP gross margin would have been up by approximately 90 basis points year-over-year. Non-GAAP operating expense as a percent of revenue was 52%. Adjusting for the onetime breakage revenue benefit in the prior year period, non-GAAP operating expenses as a percent of revenue would have declined by approximately 970 basis points. Within that, non-GAAP sales and marketing declined by 16% as we refined our marketing strategies across the business. Non-GAAP R&D expenses increased by 17% as we continue to prioritize investing in product and technology. Lastly, non-GAAP G&A expenses increased by 22% or $2.6 million, driven by miscellaneous costs as well as recurring public company costs.
We delivered adjusted net income of $31.4 million and adjusted diluted net income per share of $0.94. Our adjusted net income excludes $13.7 million in stock-based comp and a $0.5 million adjustment for income taxes. We generated $36.7 million of free cash flow in the quarter and have generated $86.3 million of free cash flow year-to-date. We ended the quarter with $341.3 million of cash and cash equivalents. We spent approximately $15.6 million in Q3, repurchasing approximately 275,000 shares of our stock at an average price of $56.77. For Q4, we are estimating approximately weighted average fully diluted shares outstanding of approximately 34 million, excluding any potential future stock repurchases.
Turning to our 4Q outlook. We currently expect revenue in the range of $100 million to $106 million, representing 4% non-GAAP revenue growth and mid-teens redemption revenue growth at the midpoint. We expect 4Q adjusted EBITDA in the range of $30 million to $34 million, representing a 31% adjusted EBITDA margin at the midpoint.
I'd like to provide you a little more color on our Q4 outlook. As Bryan discussed earlier, near-term supply constraints driven by the depletion of 2024 allocated promotional budgets is likely to result in softer redemption revenue performance in Q4 relative to our prior expectations. While we've launched offers on Instacart, we are still in the testing and piloting stage. Thus, we are planning for only a small contribution in Q4. We continue to expect that our revenue growth rate will trough in Q4 before reaccelerating in 2025 as we'll no longer be facing difficult comparisons in our ad and other revenues, and we'll be able to increase the size of our allocated budgets with a new planning cycle.
On the expense side, our EBITDA margin in Q4 will step down sequentially from Q3. We expect a typical increase in sequential marketing around the holidays, including our Thanksgiving program and increased spend on R&D, specifically with regards to our targeting efforts as well as client analytics. In addition, we expect Instacart specific costs, including Instacart launch costs and a step-up in cost of revenue driven by the Instacart contract going live, which includes certain costs associated with taking over Instacart's pre-existing promotions business. We expect these cost items, aside from the holiday-related marketing spend, to have an impact on expenses in the first half of 2025.
We anticipate a GAAP tax rate in the low to mid-30s in Q4 before taking into account an expected $52 million to $56 million positive noncash tax benefit from the release of a valuation allowance against the company's deferred tax assets, given the company's profitability and the greater likelihood that these deferred tax assets will be utilized. We continue to expect a GAAP tax rate of mid-20s in 2025 and beyond. We expect our adjusted tax rate to be approximately low-20s in Q4 and beyond. Lastly, with regards to free cash flow, keep in mind that the fourth quarter typically has a little higher working capital usage driven by greater cash out for the holidays by our D2C savers.
In conclusion, we generated strong revenue growth with healthy adjusted EBITDA margins above the high end of our guidance range for Q3. For the reasons we have mentioned, we expect the revenue growth troughs in Q4 and accelerate significantly in 2025.
With that, operator, let's please open up the call for Q&A.
[Operator Instructions] Our first question comes from the line of Andrew Marok with Raymond James.
Maybe if we could start on the commentary around the exhaustion of budgets. I guess maybe a simple question, but from the inside perspective of a brand, what are some of the blockers to allocating incremental spend to see out the rest of the year if this is a performance-based channel posting the ROI metrics that the brand wants to see?
Yes. It's a great question, Andrew. Thank you. This is -- I think, it goes to the heart of the temporary imbalance between supply and demand. Look, the CPG industry has for a long time now, had an annual cadence for planning. And that is because the measurement process has typically taken a year to come in. So they use a system where they allocate budgets and then they measure using a mixed media model or what have you. And that's been the case for years and years and years. Planning in the context of paper promotions, for example, was often done 6 months in advance because you had to literally place it in the newspaper and so forth.
We're going in and saying, look, we don't need a multi -- MMM model to be able to prove the ROI. Here's how we look at the lift and so forth. And this is actually a tool that you can use when you're lagging your year-over-year comps. And we've had success doing that in many cases. As I mentioned, that was something that we did to accelerate our way through the budgets in the third quarter and one of the reasons for the overperformance. I think the -- what we sometimes encounter though is brands saying, look, our next annual plan has been baked. You guys are going live in January, and we have an annual calendar, a seasonal calendar, and we're aligned with you and here's how much more we're spending. I mean this year, the average amount was 60% more. And then that gets flighted against their key windows in the following year versus sort of this mindset of being more of an always on as long as you like the cost per incremental unit.
I think we're not quite there yet in terms of bringing to market the solution that I described, where we're building this tool that allows for real-time or near real-time measurement of that ROI in terms of a cost per incremental dollar, cost per incremental sale. I believe from the early indications we have from some of our top clients that they're very excited about that idea. And that once that sort of takes hold, I think you will see a relaxation of this idea of annual planning and a much more agile allocation of dollars, and that's one of the reasons why we're doing it.
I appreciate the color there. And maybe one more, if I could, that could tie into the product piece. So you mentioned the integrations with new publishers that time to market is coming down pretty nicely. I guess, one, what's going on under the hood there that's driving that time to market down? And are there broader implications for the rest of your product org in terms of getting out products like your cost per incremental faster?
Yes. The time to market is coming down because we have better technical documentation because we've seen everything under the sun now or more under the sun in terms of request that we get from a given publisher for something that is important to them that might be -- might have been sort of bespoke before is something that we built, and built to be able to replicate in a future context. So that's now done. So for example, there might be a different type of offer that they wanted to support that wasn't supported previously. Well, now it is, right? Or we have the ability to launch Beer, Wine & Spirits for a given publisher. So the next time we want to launch Beer, Wine & Spirits, it's much easier to do that.
I do think our technical team has become very efficient in helping guide publishers through this process. We were able to do this with a relatively small number of resources at the publisher in 80-something days. That's a dramatic decrease. And I think that's just the learning curve primarily. I do think we want to continue to take that philosophy and apply it to other areas of our business. So for example, the ability to launch offers much more quickly and easily is really important in making sure that our sellers spend as much time as possible selling. It's important to be able to have just a level of constant background demand coming in through a self-service platform.
In the past, we've never allowed that because we didn't have the technological capability of campaign manager. And we've actually said no to many brands that we're willing to spend, but we had a minimum of, say, a $50,000 spend requirement that we've imposed. So we're excited about applying that philosophy of kind of a scalable piece of technology. And then, we're always learning and where we make mistakes in terms of the previous rollouts, we're doing a postmortem on those. We have better project management, those sorts of operating efficiencies that all goes into -- under the hood, why the time to deploy is shorter.
Our next question comes from the line of Bernie McTernan with Needham & Company.
Maybe just to start, especially with adding Instacart and we think there's still room to grow redeemers with Walmart. We think redeemers are going to grow over the next 12 to 24 months. Bryan, let's just get your confidence that you're able to kind of fill this demand or redeemer growth with budgets?
Yes. Absolutely. I think you're focused on the right thing, Bernie, which is the supply. Look, in our history, we've been doing this for 12 years. There has never been a situation where we did not see supply catch up to demand. There haven't been that many situations where demand has grown in absolute dollars anywhere near this amount year-over-year, maybe on a percentage basis, but you're talking about a very large step-up in total billings. And so we expect -- it is natural to expect that it will take a cycle to catch up, but it has in every other context done so. And we're getting really good reviews from our clients, as I said, based on the client retention. And we believe that things like e-commerce budgets tend to be allocated separately from other budgets in many organizations.
So when you come to something like Instacart, while you can't necessarily go from the time we announced that, which was, what -- the middle of August until now has been a very short amount of time to be able to go out and talk to CPGs and say, "Hey, we need you to give us dollars for Instacart." But as those budgets reset and we're looking at a new year, we know there's a lot of interest in investing on Instacart. They just -- they can't pull dollars out of programs that have been in flight and ready to go for the last 3 months. So I think a combination of factors give us that confidence.
But I think it goes back to the original question that Andrew asked as well, which is that we really want to move the industry to a place where you can simply go and say, "I want to pay this cost per incremental dollar. I want this many units sold. I have this much money to spend, go." And the system determines where to find that and allocate that across the network and uses the targeting capabilities that we're building to get smarter and smarter about delivering that efficient outcome. That is sort of the way that other forms of media are bought. And I'm starting to see a lot of excitement around the idea because it starts with a more credible approach to measurement.
We've talked in the past about things like ROAS, and that is one way to measure. But when you start talking about the true fully loaded cost of an incremental sale, they get really excited about that. And that has never been brought into the CPG environment, the way that conversion might be in the case of other forms of advertising digitally. And so I think that as you get into that, we'll start to see more of a continuous ability to just hit the available demand.
But I also agree with your assessment of the demand. I believe that it is the wrong question to ask, "Oh, is there enough run rate at Walmart?" I mean if we right now double the budgets and the offers that we have today with the audience that we have today at Walmart, we would nearly double the revenue that we have today. There is -- you don't need to do anything more than deepen the existing budgets. You don't even need new brand partners. You just need more powder to keep the offers live longer, and they will be gobbled up extremely quickly on Walmart, D2C and every other part of the network.
Our next question comes from the line of Curtis Nagle with Bank of America.
Maybe just in the same vein, one for you, Bryan. I guess -- what gives the confidence we're going to see a larger re-up in brand budgets? Like are you in the process of negotiating now? Or is it just kind of more brands are telling you we're going to spend more and we like what we're seeing, but it's more kind of a see and wait?
Yes, it's a combination. I mean we are absolutely aware of commitments that are being made right now, plans are in place for a seasonal calendar for every brand that we work with. So someone might be planning on hitting resolution, as they call it, in January, really hard with a lot of offer content. Someone else might be planning on Super Bowl, someone else might be planning on Back to School. So we do have visibility into what we believe to be -- continue to be approximately 96% retention of our clients.
And we are projecting the growth in the network and letting them know, "Listen, last year, we told you it was going to grow by a lot." And you said, "Oh, we'll see it when I believe it, I can't just allocate budget and risk it not being used." "Well, this is how much you left on the table. This year, we're telling you it's going to grow by this percent. You need to believe us and not miss out on the opportunity to get some of the most efficient marketing that you can get done." I also think there's a climate that we're increasingly aware of where people have tried things. A lot of these companies took price a year ago. They're therefore lapping really tough comps on the top line, and they're looking at year-over-year declines, and that's causing a lot of stress and pressure.
And so they're turning to various tactics, and this is really separating the wheat from the chaff. They're saying, "Well, my model told me that if I invested in this tactic, it would increase sales, but I don't see that." So how reliable is that model? Or "I invested in this other way that I thought would produce immediate results, and it didn't." And so when we come along and say, you don't bear the risk, you only pay on a success basis. We have genuine scale, especially with the addition of Instacart. We've diversified that network. And we've now got a culture of the ability to verify our measurement in various ways that are much more robust, rigorous and credible. There's a lot of, I think, willingness to lean in on that.
We just had a major CPG company in our offices earlier this week, really at the cutting edge of talking about how you would change the mindset toward this being something that you could do continuously as long as you like the cost per incremental. It's no longer, well, how many of these are incremental. They're all incremental in the sense that you can stretch someone's behavior from whatever it is now to something beyond what it is at an acceptable cost, then they'll do that, and they should always be doing that. So that all gives me confidence that this will balance out in the coming year, Curtis, and I think it's the right question to be asking.
Okay. And then just a follow-up to for Bryan. So I think you defined rollout or kind of the gearing up of Instacart through next year is gradual, which I think makes sense. But just in terms of comparatives, kind of take your pick, maybe Walmart, kind of how should we frame that in terms of how quickly or not or how quickly you can build revenue or not?
Yes. I mean I think Walmart was no exception. In the first 180 days, we saw a ramp that had sort of controlling for offer quality. There was still a ramp as people became accustomed to knowing this program existed, looking out for the program, telling their friends about the program. Part of it is that we started out with Walmart+ members only, of course, and there was still a ramp even within that. And then we rolled out to all of Walmart consumers and that further enhanced the ramp. I think that allowed us the time that we needed to go and get the large enough budgets that we would need to sort of sustain that kind of growth period that we saw over that time.
And in this case, I expect it will be a comparable type of ramp. Part of that is contractual. I mean we've learned that to move faster on the time to deploy back to the question earlier, to move faster, part of that is chunking things out into phases. And so contractually, our counterparties are not actually required to have kind of everything ready to go at day 1. And so there are certain capabilities that we want to make sure we get, which are really important, but we don't absolutely have to have on day 1.
It's not just things like Beer, Wine & Spirits. They're fundamental to feeding into our measurement approach, for example, certain types of formats of data that we'll be getting. But there are also, yes, just the marketing best practices, are you sending out life cycle marketing? Are you sending out, "Hey, we've now got a new type of offer." There's also changes in UX. So is there -- is every change in UX delivered right away? Do you have a single gallery for your offers, for example? Can you see offers alongside temporary price reductions? Or is that something that is enabled in the future? Do you have offer-led clipping?
That's one that is common, for example, at Walmart, you didn't have the ability to group things as offers and then see the eligible items for that offer underneath. You'd kind of have to see an item and then that item might be of 50 flavors in that offer, and it would show up 50 different times instead of groups by offer. These are things that we know have an impact on the usability and the repeat usage rate of these programs. And so we just want to manage expectations that there is that ramp.
Our next question comes from the line of Eric Sheridan with Goldman Sachs.
Maybe 2 quick follow-ups on this topic we've been talking about. Can you identify how widespread the budget exhaustion theme is across clients? Is it concentrated to a handful? Or is it widespread across the CPG landscape in its entirety, given maybe some dynamics around the marketing cadence of this year? And is there a way to sort of frame up a quantification of that headwind you're facing in Q4? And how much of it might have been pulled forward into Q3 versus now creating a headwind on Q4? That would be number one.
And then just sticking with the theme of moving towards always-on and direct response mentality in the industry. Bryan, I just want to come back and just go a little bit deeper on what you see as the key unlocks between either education of clients or capabilities on the tech side that you have to build so we can sort of from the outside in, look at how to assess the transition the industry is going to go through towards that type of landscape?
Great. Thanks, Eric. Let's take those in turn. I think the first question is, this question of kind of how widespread is the budget exhaustion and to what extent is there a pull forward into the third quarter over performance. There's 2 parts of that question. I mean, as far as how widespread it is, in some cases, there are dramatic increases in budgets from a client, and there is no exhaustion of those budgets. And we're working to get more clients in that bucket. In some cases, they just didn't allocate nearly enough and now are realizing, gosh, I wish I'd allocated a whole lot more.
It's not sort of a widespread phenomenon, I wouldn't say. I think that it can only -- it can be a matter of a small number of large clients needing to re-up that budget that can have a pretty outsized effect because they have high frequency, what we would call high inventory score items. And so just being able to get them back and live makes a big difference, right? So that -- I think when we can -- and I mentioned the client that was in our office earlier this week, that's an example of one that if we can get them into this DR mindset, I think, would dramatically affect the inventory score for the entire year, right? And so I think that there's an awful lot of different campaigns running at Ibotta. We had 100 million redemptions in a single quarter. We have a lot of different clients.
They're certainly not uniformly saying, I'm out of budget. But I think generally speaking, it tends to be toward the end of the year when they're kind of running dry on these things and you combine that with just the fact that some of them are kind of a little conscious of making sure they protect their bottom line and their upcoming earnings calls, having missed the top line. And you get some situations where people say, "I need another month or 2 to come back with a vengeance", and they need to advocate for that in their process looking at the next year's budgets.
But I can't really quantify it for you any better than that. What I can say is that a lot of the most valuable content that's come out is content that we know is coming right back in. So I don't want to use specific client examples, but our biggest clients, the ones that are doing some of the highest inventory score things, they're very, very happy with our program. They're pushing content live. And I think we're going to see a meaningful step-up in that content next year, and we've been working with them for over a decade. And our capabilities and our scale are just better, and it just requires them to plan ahead for that type of scale.
As far as the pull forward, yes, I do think that's a dimension in some cases. I mean we were able to go and get some of those incremental budgets mid-cycle. We were able to hit that Back to School window pretty hard. I think that was valuable in some cases. There were clients that responded to other clients' participation. I think Sunit on our last call mentioned the chicken wars. We certainly had examples of clients leaning in heavily and spending in key categories where there was a competitive dynamic that drove some of that pull forward in the third quarter. And we are continuing to look for those incremental dollars, but we are also cognizant that we need to be realistic about that in this quarter.
So as far as the DR mentality and the key unlocks there, it's a couple of different things. I think, first of all, it starts with the credibility of next-generation measurement. I don't believe the promotions industry has ever really had truly next-generation real-time measurement of incremental sales. Keep in mind, this is an industry that's still charging people on a cost per clip basis. It's still charging people on a cost per print basis. And the idea that you can measure the lift from something like that is really speculative. It ends up being just one input in a large econometric model or it's something you don't even attempt to defend from an ROI standpoint because it's just done in order to [ curry ] favor with your merchant or get an end cap or close a quarter.
Our aspiration is very, very different than that. We want to be measured, and we want to be measured so that we can establish that there is no tactic or strategic pillar of your plan that generates higher true ROI. Yes, you can always use promotions to close a quarter. Yes, the scale driver adjust your price point quickly. You saw some of that going on in the third quarter as people needed to adjust their price point. But we want to be earning our place in the pantheon of the Facebooks, the Trade Desks the Googles of the world, and that's done by having incredible measurement framework that's validated by third-party companies and that is accepted by the people in the internal measurement teams of these companies. And I think we made great progress on that this year.
But we're going to continue to push that out. So the ability to log in and see a real-time cost per incremental projected cost per incremental is something that's coming in the first half of next year. We've already got a version of that, but I think that will continue to be a very important product development for us. And so there's work on our end to socialize that, and there's also work to iterate on that.
Then there's also the more sophisticated targeting. I mean it's one thing to measure your cost per incremental. It's another thing to make your cost per incremental lower. So that's about using sophisticated modeling and projections, technology to put the right offer in front of the right group of people and project the cost per incremental based on all the data that you're crunching, eventually making that a more machine learning-driven process and driving even more efficiency. And I think that is something that in the back half of next year, we'll see more and more and more; more automation, more sophistication, lower and lower cost per incremental unit. So it's the second step, if you will, after the credible measurement.
And then, of course, the third thing is you continue to deliver scale. That's not our problem right now. We have tons of redeemers growing like weed, and we have -- like [ a weed, ] and we have lots of different publishers that we're excited about in our pipeline. Our focus is on really changing that mindset. And that is also -- there is a lag to actually go out and telling that story, telling CMOs and CEOs, listen, if you don't want to lose market share, this is what you should do. This is the lowest, this is the cheapest way to grow your market share in an observable way. And that's something we've really invested in with our B2B brand in this year of our IPO. I think we've raised the profile of our network dramatically this year. That's been great. But those are all ingredients that are going to be necessary to create that.
You're changing hearts and minds about an industry that has not had any of these capabilities, and you're trying to kind of really get into the upstream in the planning and strategic planning process with this type of -- sort of technology. And so, there's a little bit of lead time you need to be in that planning process, which can be 1 or 2 years out. But what's super encouraging is that as we talk to the most sophisticated CPG companies in the industry, and we walk them through this methodology of measurement and this type of targeting, they get really, really excited. And the scale that we're able to deliver, coupled with that efficiency is not something that they're finding elsewhere. So I'm super bullish about what that means for the long-term prospects of our business and our network.
Our next question comes from the line of Andrew Boone with JMP Securities.
I wanted to go back to D2C. So let's change the topic slightly. With the 15% or mid-teens kind of redemption revenue growth, that kind of implies a pretty significant decrease for D2C ad and other revenue, while D2C redemption revenue missed at least our estimate for this last quarter. So can you just talk about the balance of how you're viewing the D2C side versus third-party redeemers?
And then if I look at 4Q EBITDA guidance, it implies a pretty significant step-up in terms of OpEx. Sunit, can you just talk about where you guys are investing and how we should think about that cadence as we enter 2025?
Sure. I think on the D2C side, sequentially anyway, the revenues have been stabilizing. You can see that I don't think we see much of a change sequentially in the fourth quarter. The redeemers also are staying fairly level. The ad revenues, as we mentioned last quarter, are around $14 million a quarter. I think we still feel we're in the same place with respect to the fourth quarter.
In terms of expenses, they're really kind of 3 things. One is, we usually have a higher marketing expense for our Thanksgiving program, which has been very popular, and we get a lot of good publicity about it in terms of providing cash back during the Thanksgiving period. Those we were featured on the TODAY Show just a couple of days ago. So that's an expense that's several million dollars that's once a year that steps away.
Secondly, with all the things Bryan has been talking about, we've been looking to add headcount in the technology side for targeting, for analytics. We didn't manage to do much of that in the third quarter, but we did add them on as we entered the third quarter. So some is just headcount expenses that will go forward.
And the third thing is Instacart that I talked about in my remarks. And obviously, that cost will continue. But again, those are more fixed type costs ramping up this year -- this quarter, the fourth quarter and then kind of leveling out in the first quarter and then they don't really go up much. So those are the things you are seeing on the expense side.
Our next question comes from the line of Mark Mahaney with Evercore ISI.
I'll just ask one question. Sunit, you talked about acceleration that -- Q4, I'm sorry, being the trough in terms of year-over-year revenue growth and seeing acceleration next year. And just help us flesh that out a little bit.
Do you want to range that? What kind of acceleration we could see? And is it something that you think looking at the comps, thinking about the product rollouts, thinking about the customer -- the partner rollouts deployments, is that something that should steadily accelerate as you go through the year? Is there any reason to think that? Or is it more likely to be jerky, but generally accelerating? So just give us a little more color on that comment.
Sure. I think the main thing has to do with our comps, our year-over-year comps in terms of what happened this year. So I mean, if you look at this year, we've had negative comps on the D2C side and on the ad revenue side. As you switch into the first quarter, those negative comps recede like on the ad side, don't see much change there. That remains fairly flat, like we said, about $14 million a quarter, similar on the D2C side.
And then what we obviously see is continued add on new publishers. We'll get -- start getting more Instacart revenues going forward, continued strong growth in the third-party publisher business. So just as you work through the math of it, it's clear that we are troughing here in the fourth quarter, and it should accelerate pretty significantly next year.
Our next question comes from the line of Ron Josey with Citi.
Bryan, with Instacart now live, at least testing live, just wanted to hear a little bit more on the results you're seeing thus far, just given the digitally native audience and sort of are you seeing greater usage of the coupons and everything?
And then sticking to Instacart, Sunit, maybe following up on Andrew's comment. You talked about [ cart ] costs -- Instacart costs impacting COGS and expenses in the first half of '25. A little more insights on that would be helpful. And then -- so that was Instacart.
And maybe just one last one. We saw 3PP redemptions per redeemer up 20% year-over-year. That's great to see. Just wanted to understand if you're seeing a broader mix of demand in other verticals that you're offering?
Great. Ron, thanks for the question. I'll tackle your first and third question, then I'll hand it to Sunit to tackle the Instacart cost question. So with regard to early indicators in Instacart, the good news is we believe that when we have offer inventory, we're going to enjoy a very high redemption rate on Instacart in the same way that we do on e-commerce on Walmart because you are seeing -- it's a very easy way to redeem offers. You simply find them in the flow of discovering -- you search for laundry detergent, you find a product that has an associated offer. You put it in your cart, you check out, you get your discount, in this case, it's a discount. So we're excited about -- it's very, very early. It's just a pilot.
But we're excited about the redemption rate. I think really the key is just the inventory that we supply and needing to make sure we have a deep budgets that overlap with the kinds of products that are sold on Instacart. It is also something that supports the growth of our general merchandise. As we think about the pipeline of retailers, we do want to focus on non-grocery retailers as well, things that give us access to an inventory of products that go beyond grocery. In that regard, Instacart is super helpful because it works in places like Costco and Lowe's and elsewhere. And so, we believe it will be -- that will be a dimension in propelling and kind of diversification beyond just Walmart is really important for that general merchandising business.
I also think the Beer, Wine & Spirits, that's obviously a part of what happens when you get delivered items, you get those items delivered as well. And so that will be an interesting thing. We haven't launched it yet. We're going to be paying close attention to that. I think one thing that I'll be paying close attention to as well is just the reaction of the market to the improvements in promotions that we're bringing relative to what they had with Instacart. I think that Instacart's focus has not been on promotions. It's been on a lot of other things, and they're doing a great job. But we're upgrading a lot of their capabilities, whether it's targeting, which wasn't available; whether it is a pricing system that makes more sense and is more variable based on the MSRP of the product; whether it is being able to show promotions alongside temporary price reductions, those are things that it's too early to tell the impact of that, and some of those are on that 180-day rollout, but it's still -- those are things I'm excited about.
In terms of your third question, which is the mix of redemptions and redemptions per redeemer, et cetera, yes, we're continuing to see, as I said, the doubling in the percentage of general merchandise that's bullish, especially in the toy category. I would emphasize that, that's been pretty exciting. I think that is going to -- that mix shift is going to have an impact on the fee per redemption and on the number of redemptions per redeemer. But overall, as we get more and more mix shift towards third-party versus D2C, you're going to see lower redemptions per redeemer, but just a lot more redemptions just because the intensity of usage has always been different on third party from D2C.
I'll let Sunit answer the cost question.
Yes. So on the Instacart cost question, just remember that, that business is different from other publishers that we've added to the network. In this case, we were assuming -- we are assuming Instacart's or taking over Instacart's existing promotions business. So there are certain costs that come with that. There's a little bit of a step-up in the cost of revenue given our contract with them. So that's what I meant.
But these costs are relatively fixed, except that the fourth quarter is a transition. First quarter, they'll generally be in place, which will continue in the second quarter. But after that, they don't ramp as much. So what that means is, it impacts our margins in the short term Q4; to some extent Q1, Q2; but after that, incrementally -- the incremental margin expansion or the margin expansion story we've been talking about, nothing has fundamentally changed with that.
Our next question comes from the line of Ken Gawrelski with Wells Fargo.
Two questions, if I may. First, Bryan, how do you think about -- at what point do you think you'll have confidence in the supply side of offers to fulfill what could be a very strong demand year in terms of the number of redeemers and as you add the Instacart demand to the platform? When will you have visibility into that? Will it be at year-end in January, February into annual budget renewals? Or will it evolve over the course of the year? That's the first one.
And the second one, could you just talk about how you -- how D2C is prioritized versus relative to 3P. So when there's a supply-demand imbalance, more demand in the marketplace which you have today than kind of supply of promotions or supply of budgets. How does the 3P versus direct-to-consumer side get prioritized? Is that -- is the lack of supply driving some of the direct-to-consumer weakness we're seeing today?
Thanks, Ken. Both great questions. First one, look, we have confidence in the supply side of our business because, as I said, we have 12 years of history of watching it follow the growth in our network. And we've had a lot of conversations with our top clients to the effect of we're excited. We are so excited about Instacart coming on board. We're going to be ready to go in the beginning of the year. We're excited about the growth of your network, and there's just sort of a, well, you've earned the right to grow your budget by this percent. And so we have that visibility. We don't provide guidance out beyond this current quarter because we just haven't done that, and it is difficult to see an entire year of that.
But we do have a lot of confidence in the rebound of our supply for the reasons that I cited earlier. And so I don't want to overstate it and make it seem like we're flying blind here. I mean we do have a lot of visibility into it. It's just that the -- a lot of these brands are on an annual planning cadence where they reset at the beginning of the calendar year, and we think we're going to do a better job of pacing that and making sure that we don't run out of inventory by the end of the year. And I think that, that's only going to be further enhanced by the improved measurement targeting that I discussed earlier, which gives me a lot more confidence.
As far as the second question, it's pretty simple. We focus on overall redemption revenue. So we're not trying to steer content toward the D2C or the third party, which means that if we have a massive amount of redeemers on third-party gobbling up offers, then so be it, particularly because there's a very low or no cost of acquisition in those environments versus the higher cost of acquisition on D2C. I suppose, we could kind of earmark a budget for D2C, but we don't do that. It's one of the reasons why if I had it to do over again, I'm not sure I would really break that out because it's not terribly consequential.
Our brand partners don't say, well, I want this much on D2C and this much on third party. They say, I need 1 million units at this cost per incremental unit go, right? And so yes, it's absolutely -- the explanatory factor for D2C is sole -- almost sole factor is inventory availability. If a campaign a year ago would have stayed live for 16 days and now it stays live for 12 days or 13 days, that is the reason why redemption revenue on D2C is lower. And because that's all coming out of the same budget, that's exactly why. And that's why we focus on the overall redemption revenue and it being up 32% in this most recent quarter.
I do think that going forward, the important thing is just to deliver that efficiency at that scale. D2C is great because we have a very high degree of sophistication and targeting. And so, it will be an important source of driving very efficient campaign volume. So I can -- I have the ability to tailor that and say, okay, Ken should be asked to buy 2 of these and be given $0.50 to do so, and that works out to the right cost per incremental, whereas in other environments, we have various degrees of sophistication and targeting and so forth.
And so, all those things and the degree to which we allocate content to channel A, B or C will be affected by this mindset of delivering a certain degree of scale and a certain level of efficiency and this concept of kind of a slider where you can choose where you want to be on that curve.
Our last question comes from the line of Chris Kuntarich with UBS.
Bryan, I just want to go back to the comment you had made about a small number of large clients that need to re-up. Can you just talk about the consistency in the past, either on a percentage basis or on a dollar basis and which kind of over a multiyear period, those budgets have stepped up? Are they consistent? Are they kind of growing incrementally each year?
Yes. That's -- I wish I had all the data to answer that right now. I can follow up with you, Chris, if we have more of that data. But look, what I can tell you is that we started out with an overall budget of maybe $2 million. And now we're in the hundreds of millions, approaching the billions of dollars of total investment on the network. There has been a very consistent track record of stepping that up to match the demand. And the gross billings have gone up 65% year-over-year year-to-date. That's an average. In some cases, they've gone up 5x, 500%. I mean I can think of 1 or 2 clients that are up even more than 5x. They're up 10x, 20x. And then some clients that have remained flat or have not kept up with the growth of the network. And so their percentage has declined relative to the available opportunity.
When we go to these clients, we very often have a slide that says, this is the percentage of the overall opportunity that you're taking advantage of right now. And it tends to be very, very low, right? And so again, we could not grow by a single redeemer and still very substantially increase our revenue and to be able to show them that and say, you're leaving this cost per incremental unit on the table is very powerful.
As far as empirically, how much is -- are the large clients stepping up? I would say that, generally speaking, you have a couple of different kinds of clients. You have the clients that are more or less always on, and they're there for whatever level of growth you have, and they're great as a sort of stable backstop you have them, you have a subscription agreement with them. You have a lot of visibility into that or they just have a system where they run it for this many days and that's that and they cost what it costs, and that's great. There are other clients that really think about this as during key seasonal windows or episodic. And then there are some clients that are looking at this as kind of gap-fill and got to make sure they catch up in a quarter.
We're dealing with different buckets and different situations. But what I would say is that overall, I'm not aware of very many clients that aren't planning on -- I can't -- sitting here right now, I'm not aware of any clients that are planning on not taking advantage of the larger volume that we get from, say, Instacart or just the growth of the network. And generally, they're like, this is great. Our problem for the first 8, 9 years was we would perpetually hear, there's not enough cowbell. Now we're giving them all this scale, and they're adjusting to the idea that Ibotta is really the kind of tactic that you can use that can move the percentage of your Nielsen points by a point or 2 in a matter of weeks. And that mindset takes more than a minute to sort of seep into planning and into the consciousness.
The last thing I'll say, Chris, which I think I haven't said elsewhere on this call is that we're now meeting with much more senior people, right? Since the IPO, the level of access that we've gotten is radically better than it had been before. So we're now meeting with the CEO, the CMO, the Chief Growth Officer, whereas before maybe we were meeting with the Head of Promotions or the Center of Excellence. And that's -- you want to meet with those people, but now you're in that conversation about a major strategic partnership that's got a horizon in multiple years and you're a major pillar in their marketing plan, you're upstream in their multiyear strategy, you understand the problems with their business and you can creatively respond to those problems.
I think that, combined with the innovation we're bringing to the market is going to lead to really exciting places. And that's why I spent so much of my time in the last 6 months on the road speaking with these people. And I'm super bullish on what has come out of those conversations.
Thank you. There are no further questions at this time. I'd like to pass the call back over to management for any closing remarks.
Thank you very much to everyone who's joined us today. We appreciate all the great questions, and we look forward to engaging with you further.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.