Roblox Corporation (NYSE:RBLX) Q1 2024 Earnings Call Transcript

Roblox Corporation (NYSE:RBLX) Q1 2024 Earnings Call Transcript May 9, 2024

Roblox Corporation beats earnings expectations. Reported EPS is $-0.42613, expectations were $-0.53. RBLX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Tamika and I will be your conference operator. At this time, I would like to welcome everyone to the Roblox First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. I will now hand today’s call over to Stefanie Notaney. Stefanie, you may begin.

Stefanie Notaney : Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox’s First Quarter 2024 Results. With me today is Roblox Co-Founder and CEO, David Baszucki, and CFO, Mike Guthrie. As a reminder, our shareholder letter, press release, SEC filings, supplemental slides, and a replay of today’s call can be found on our investor relations website at ir.roblox.com. On this call, we will make some brief opening remarks and reserve the rest of the time for your questions. Our commentary today may include forward-looking statements, including but not limited to expectations of our business, future financial results, and strategy. Forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in our forward-looking statements.

A description of these are included in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update these statements, except as required by law. During this call, we will also discuss some certain non-GAAP financial measures. Reconciliation between GAAP and non-GAAP metrics can be found in our press release and supplemental slides. With that, I’ll turn the call over to Dave.

David Baszucki : Hey, thank you. Hey, welcome all the Roblox investors, new investors and long-time investors. And we’re pleased to be here with you to report on our Q1 2024 results. We continue on our mission to connect a billion people every day with optimism and civility around the world and we’d like to report in on our progress. In Q1 our DAUs came in at over 77 million daily people on our platform with year-on-year growth of 17%. Our over 13 DAUs were particularly strong growth at 22% year-on-year. And we continue to highlight the growth of our platform around the world with Japan, which is a key gaming market growing at 50% year-on-year and India which is a huge market growing at 58% year-on-year. Our hours engaged were 16.7 billion in the quarter that’s 15% year-on-year growth and once again very strong growth over [13%] (ph) and very strong growth in countries around the world, including Japan and India.

Revenue was $801 million, which is 22% year-on-year, and that was higher than our guidance range of $755 million to $780 million. Our bookings were $923.8 million, which was in the middle of our guidance range of $910 million to $940 million. But I do want to highlight we wanted that number and expected that number to be higher, and we’re going to dive into that a bit in a year. That represents 19.4% year-on-year bookings growth. And one of the big focuses that we’ve had which is on our operating efficiency, came to light with our cash and consolidated net loss. Our net loss of $272 million based on GAAP accounting was relatively flat with Q1 of last year. And our guidance was a net loss of $347 million to $342 million. So this was remarkably less of a GAAP loss than that.

We continue to operate extremely efficiently and to manage our CapEx. Our cash flow, net cash flow from operations in Q1 was $238 million, which was up 37% year-on-year. And our free cash flow in Q1 was up 133% at $191 million. This is 50% more free cash than we generated in all of 2023. The past three quarters on infrastructure, trust and safety, well the platform performing better and better in all of these areas and the quality going up through the use of AI, internal efficiency, the way we have optimized our infra and our trusted safety we have actually made huge efficiency gains there, and we have reduced these costs. On the personnel side, we’ve been very thoughtful in how we are hiring and how we are growing our headcount. We’ve been relatively consistent over the last three quarters and the size of our headcount, while we continue to focus on growing our economy ads team, our AI safety team and our live operations events team.

I just want to highlight what we — on the theme we started three quarters ago, which is getting bookings growing faster than other areas, we continue down that path. Once again Q1 bookings 19.4%, trust and safety infrastructure while increasing quality 4% less year-on-year and personnel at 20% growth. So we’ll continue this. But those of you watching us, you will see — you can see that our bookings in Q1 grew faster than DAUs in hours. I want to make a few comments on this. First, we continue to see the general number of people on our platform being very strong. We don’t report the number but we did see less growth in Q1 that we expected and we wanted to highlight where we believe this is coming from. First off, we shipped a bunch of new tech in the second half of last year.

We rolled out Dynamic heads, layered clothing, anti-cheat, expanded voice, and we believe, especially in low-end Android, even near the end of Q4, we are starting to see some drag with this. This started to show up in Q1, and we spent the last three months analyzing and really improving this up and down the stack, and we’ll talk about this a bit more. The other thing is, we believe once again, in the midst of a great Q4, our velocity of new content and our velocity of highlighting just the amazing amount of new content bubbling up on our platform was not optimal. And once again, over the last three months, we have made a lot of expansions and enhancements in our search and discovery system that we’ll talk about with you. We’ve also taken a lot of steps on live ops and content that we’ll talk about.

We’ve done a lot of stuff around our economy in the last three months. And I want to highlight, over the last — really the last half of April and the first half of May, we have seen USA and Canada bookings, DAUs and hour growth come back to north of 20%. Now that is not showing in our full Q1 numbers. And as for those of you that have read our letter, you will see that we are going to be more conservative on our guidance primarily because we only have three weeks of data from these improvements. So we are going to be looking at lowering our guidance in 2024 a bit, Mike will highlight that. That said, we have a lot of operating efficiency going on. We are not going to be changing our implied guidance on free cash flow for the year, and we’ll continue going forward with conservative hiring growth once again in economy and adds AI safety and content and live apps — our live ops.

And I also want to highlight internally our advertising plan, which we’ll talk about a bit more is on track. So hey — some more detail on discovery. We really have done a lot of work here over the last three months. And the highlight here is we are optimizing and want to be optimizing not just short-term improvements in bookings and DAUs, but long term platform health as well. For those of you that are watching our home page, you have seen over the last three months, an addition of curation to the homepage, which we call top picks. You have also seen that we’ve moved sponsored, which is for those creators who want to purchase traffic on our platform start to be a much bigger share of impressions. And we’ve also continued to make adjustments to our core ML algorithm as well.

We believe over the last three months, this is increasing the discovery and velocity of new and upcoming content. And the mix of new creations on our platform is in a much stronger position than it was three months ago, and more to come there. The other thing you’ve probably seen over the last three months is the first introduction of a more aggressive live ops philosophy. We ran the Hunt, our first live ops event of 2024 over the few weeks before and during Easter. And we saw an incredible engagement, a lot of reactivation there, and we are going to continue this. The community loves the notion of bringing together all of the diverse content into a rolled-up event. For those of you interested in seeing the interest, if you look at my Twitter feed, I think I’d say, I hinted at our next event.

And this is probably by 2 times to 3 times, my most engaged tweet I’ve ever done. On our virtual economy, I want to highlight that as we’ve gone to a UGC economy, our economy team has been hard at work, working through how to optimize both utility from our users, as well as utility from our creators and utility from our platform. And in February, we launched dynamic price floors in our marketplace, which is really driven a much healthier economy, as far as the pricing of those items. And this is starting to contribute once again to that 20% last 3 weeks USA and Canada bookings growth that we’ve seen. We’ve also launched on the tooling side adjustments to our economy, we really want as many people creating as possible. And so in our creator store, we have just decided for all of the people building tools, plug-ins, message, images, fonts, 100% net proceeds to them because we – there is really no need for us to try to make a profit there.

Finally, the long-term vision of everything in our marketplace being UGC, we call that UGC for all. Over the last few weeks, we have launched that. We’ve opened our market to more creators, it is a big step forward for brands to create Avatar’s clothing and accessories as well as the rest of our creator community. Highlighting on some of the work we’ve done around performance and quality, a lot of which showed up, especially in low-end Android devices, and we’ve been diving in on — there’s been a huge focus on analyzing metrics and perf in a much more granular set of cohorts around the proof of our platform. We have made significant frame rate improvements, we’ve made significant stability improvements, especially in our most difficult devices.

Once again, that’s low-end Android. Also on Windows as well. These results, some are directly measurable in DAUs and spend. And we’ve also enhanced the quality of graphics on higher-end devices. So we believe — also this effort, which we’ve really been heads down on has contributed to that last three weeks, US, Canada back to north of 20%. On the advertising, which will not be material this year and that is why we haven’t shared the forecast. We are on track with our forecast. And we have done a few things that have been exciting in April. We announced our partnership with PubMatic in April, we did our first real-world shopping test with Walmart on April 29. We have a lot more of these tests rolling out. And finally, on May 1, we announced that video ads would be available to all of our advertisers through self-serve on our ads manager, and we are really excited about the opportunity of video on Roblox in addition to our portal and site visit type units just because there is so much supply there.

On the measurement side, we have started the independent measurement, which is critical to our advertisers. We have, had some really lovely results on that. We’ve brought in a brand less solution with Cantor and our direct sales team has been attending events like play fronts and new fronts. We have had — by the end of this quarter, over 370 cumulative brand activations. And also I just want to welcome more talent to our ad team on the engineering product on the live ops side. Could welcome David from Google, David Vespe, who built a lot of engineering ad tech at YouTube. On the creation side, for those of you that are tracking AI more and more we’re seeing that data for training is critical. And there are some companies out there they have certain types of data that allows them to train, optimize this still and build their own AI solutions that really leverage our data.

We have an enormous amount of data at Roblox. We have a lot of trust and safety data, we have a lot of people writing code and building 3D objects and creation data. And we’re more and more starting to lean into really building our own AI platform built on this proprietary data in concert with all of our users. So I want to just highlight a few of those things, we continue to roll out generative AI assistant tools on AI stacks that we have built. Earlier this year we launched our tester generator, which is an AI tool to help creators efficiently test your objects. It’s absolutely amazing. We rolled out in a tool we call Avatar auto setup, which we were in Open alpha, I believe we went live yesterday or a day ago, which allows standard industry Avatar models which are not necessarily ready for 3D simulation or facial animation to be automatically rigged and turned into full 3D interactive Roblox Avatars.

And finally, Code Assist is our own in-house code optimization and code generation tool. This continues to get better and better as well, and we have quotes from devs who are mentioning a 5% increase in efficiency, and this is still very early. Finally, our safety platform, which has been the foundation of really everything we’ve done since we got started continues to get better and better. We are using AI up and down the stack as we have mentioned, we built and run on our own infrastructure, increasingly high-performance voice models that are helping us really keep all the voice on our platform safe, as well as using AI to help in the moderation of every asset type on the platform. So Synopsys, Q1 we saw less growth than we expected. That said, we exceeded our margins on cash flow targets the last three weeks in US and Canada with all the work we’ve done in Q1, which is in response to this.

We are back to north of 20% growth on bookings, hours and DAUs. But we want to be very transparent, conservative and responsible and that is why we made the very difficult internal decision to adjust our bookings guidance. And we believe we will continue to deliver the same operating free cash flow that we implied in our guidance last quarter while making judicious hiring in our economy AI content, live ops and safety groups. With that, I’m going to turn it over to Mike, and then we will have Q&A.

Mike Guthrie : Thanks, Dave. I just want to turn everyone’s attention to Pages 24 and 25 in our supplemental materials, which are on the IR website. And just to reiterate a couple of things that Dave said. So on a bookings number of about 19.4% growth, we continue to generate really good cash flow dynamics on Page 24, you will see cash from operations, this really reflects operating leverage primarily in infra, trust and safety, as Dave mentioned, more of using artificial intelligence, requiring less and less on manual moderation and also leverage across head count — by keeping head count flat over the last three quarters. Operating cash flow for the quarter was almost $240 million up significantly over last year. Again that’s all operating leverage.

Also on Page 24, just the shape of the curve that shows how we — how this metric moves during the course of the year. So Q1 is normally our highest quarter. We have a big working capital cash flow inflow from the Christmas holidays that comes in, in Q1. So collections are high. Q2, that number goes down. You can see our guidance. We’ll talk about that in a minute is for good year-over-year growth, but the shape of the curve will stay roughly the same, and we are expecting solid growth in Q3 and Q4 as well. If you turn to Page 25, what you will see is the same number less capital expenditures and free cash flow in Q1, $191 million versus $82 million this time last year. That is both the combination of the operating leverage that we talked about as well as a significant reduction in capital expenditures now that our infrastructure, second data center are all in place.

So we are through a CapEx cycle. We talked about this at Investor Day in November. So really strong free cash leverage. This is significantly more cash flow than we generated last year and if you look at our guidance, we put a big dent in what we need to produce for the rest of the year to be on target. As it relates to guidance — we are — if you look at the shareholder letter, and we are guiding to revenue bookings, consolidated net loss and now adjusted EBITDA rather than what we had referred to before as covenant adjusted EBITDA. But we’re giving everybody all the constituent parts, so that in your models what you have to do here is take the adjusted EBITDA number and add back the change in deferrals that will [foot] (ph) with your prior adjusted EBITDA in your model.

We’re happy to talk about that on calls. We have good growth forecasted in cash from operations, again moderated CapEx and solid free cash flow on a year-over-year basis and looking strong for the full year. And with that, we’ll stop the comments and then turn it over to the questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from the line of Bernie McTernan with Needham & Company.

Bernie McTernan: Great. Thank you for taking the question. Just two for me. First understand the commentary on search and discovery, but are you seeing any changes in the pace or quality of content that’s hitting the platform? And then for live ops, Dave you suggested that there is a next event coming, but how many events are you doing a year, how much makes sense for the platform and kind of maybe what’s the pipeline of good ideas that would have the accretive benefit that the Hunt had? Thank you.

David Baszucki: Yes. I would say, first the distribution of content in Q1 is I would say more distributed than we saw in Q4 in a general way, which highlights new content grading more market share. In Q1, we also — I believe saw more velocity of new experiences entering our top 20 than we saw in Q4. So this is I believe working on the events, we have to be thoughtful in announcing the full schedule. But I would say, between every one and two months, we expect to do one. The next event, you can if you dig into Twitter, you can figure out what it is going to be, and it’s going to be awesome. So we do think these are ways of highlighting the key strength of our platform, which is a wide range of distributed content many, many of these pieces of content hitting north of 1 million daily actives. And so yes, I think this is like more good stuff to come with our events.

Operator: Your next question is from the line of Drew Crum with Stifel.

Drew Crum: Okay. Thanks. Hi guys. Good morning. So you mentioned the performance — recent performance for KPIs trending around 20% year-on-year. But at least for 1Q this was the second consecutive quarter in which year-on-year bookings growth has outpaced the year-on-year rate of change for some of your other KPIs like DAUs and hours engaged. Any sense as to what’s driving this? Is it a trend you expect to continue going forward? And then lastly you had previously endorsed a 20% growth rate for bookings for 2025 through 2027. I know it’s only one quarter, but with the adjustments you’ve made for ’24, is 20% still an appropriate longer-term target? Thanks.

David Baszucki: Yes. I will comment first on one which is I highlighted that we want all of those numbers marching in step at 20% DAUs, hours and bookings. And one of the signs in Q1 that really things weren’t where we wanted was that drift between bookings engagement an hour, and we also saw that in numbers — just internal numbers, which we generally refer to as general people on the platform versus DAUs and our hours. So the last three weeks, we have seen all of those numbers in arguably our most mature market, which is USA and Canada, all three of those numbers north of 20%. We want the DAU number, not that we are guiding to it to be north of 20% as well. And then I’ll kick it over to Mike.

Mike Guthrie: Yes. Drew, over the last couple of quarters, the bookings per DAU and bookings per payer have gone up, which is good. So monetization has been higher than — has driven bookings growth higher than 1,000 hours. And generally, that’s a pretty healthy trend. The movement isn’t enormous, it’s a couple of percent, 3% this past quarter. There is always a little bit of flux in that number as payers season, they tend to spend more on the platform. So there is always a [bounce] (ph) between how many new payers or how many new payers are coming in versus how many payers are seasoning and becoming longer-term payers. But the numbers are relatively close on a year-over-year basis. So to Dave’s point, generally, we think those numbers will move pretty much in lockstep. But in any given quarter, 1,000 hours can grow faster than bookings or bookings can grow faster than 1000s hours. But our goal is for them to be pretty much in lockstep.

David Baszucki: And then if you look at Roblox far out there, you could see both within the US as we layer in advertising and other forms of monetization, it is conceivable to imagine our bookings per hour goes up in the US and Canada. Because right now, we are not really fully tapped into the advertising market that’s complemented by some countries that are going to have enormous DAU growth like India that may monetize less. So we have both some forces driving bookings per hour and other forces driving our DAU numbers, and they’ll complement each other.

Operator: Your next question is from the line of Aman Dessouky, Bank of America.

Omar Dessouky: Hi, it’s Omar Dessouky, not [Salesky] (ph). I thought the prior analysts had asked about the 20% kind of outlook that you talked about in the Investor Day for [‘25 to ‘27] (ph). Were you guys — did you answer that question in the response? I’m sorry if I didn’t hear it.

David Baszucki: No, we didn’t — we forgot to answer it. Yeah, we still believe that the business has that kind of growth potential, without a doubt. What we’re seeing right now in the beginning of Q2 is encouraging, and we absolutely still believe the business has that kind of growth potential.

Omar Dessouky: Okay. So then it’s — we should kind of think about calendar ’24, the lower guidance is a one-off due to the factors that you mentioned, such as lapping PlayStation and the Easter. Is there any more color you can give on like in ’25, like how much of that growth would be driven by core versus advertising. I think you’ve said in the past that north of 20%, is that still kind of the outlook north of 25%? And has your thinking of like advertising versus core change at all for those out years.

Mike Guthrie: Thanks, Omar. No I don’t think the out year thinking on ads versus the core business has changed. We are going to — we will give early next year, when we give guidance on 2025, we will give guidance on advertising for the first time, so we’re going to do that. We believe we have enough of a foundation and momentum to guide on that number for next year. The back half of this year, really what we’ve done is we’ve taken the growth rate that we believe is implied by our guidance for the first half of the year and applied it to the second half of the year with a small decline just based on Q4 of last year, which was obviously our highest growth quarter and had things like PlayStation, which we’ll be lapping this year.