Roblox Corporation (NYSE:RBLX) Q3 2023 Earnings Call Transcript

Roblox Corporation (NYSE:RBLX) Q3 2023 Earnings Call Transcript November 8, 2023

Roblox Corporation beats earnings expectations. Reported EPS is $-0.45, expectations were $-0.52.

Operator: Good morning. My name is Christa, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Roblox Third Quarter 2023 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] Thank you. I will now turn the conference over to Stefanie Notaney, Senior Director, Financial Communications. Stefanie, you may begin.

Stefanie Notaney: Thank you, Christa. Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox’s Q3 2023 results. With me today is Roblox’s 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.roboxs.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 certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our press release and supplemental slides. With that, I’ll turn it over to Dave.

David Baszucki: Thank you, and welcome everyone to our Roblox Q3 2023 earnings call. A couple of quick highlights. We’re going to continue to talk about our delivering growth strategy, highlighting our vision of reimagining how we come together, and continued moving forward on our mission to connect 1 billion people with optimism and stability. We’ll highlight some of the product velocity and new monetization opportunities, we’ve been working on. And we’re also going to give an update on our commitment to deliver operating leverage, which we shared in our letter. Finally, highlighting the — really the breadth of our business which is connecting people around the world, connecting people of all ages, and all backgrounds, and highlighting the complexity of the business that spans so many cohorts.

Today, for a first time, we are going to give you a little hint at guidance looking forward, and Mike will do that after my discussion. Diving into Q3, a real strong quarter all-around. GAAP revenue Q3, $713 million, up 38% over Q3 2022. And diving more into how we run the business, which is on bookings and cash bookings of $839.5 million, up 20% year-on-year. Cash flow from operations, $112 million and $59 million of free cash flow. Our DAUs hit 70 million, which is up 20% year-on year. Total hours of engagement, 16 billion in Q3, which is up 20% year-on-year. And from a liquidity standpoint, over $2 billion of net liquidity and $3.1 billion of total cash equivalents and investments. And finally, on a covenant adjusted EBITDA basis, we hit $81 million.

So let’s talk a bit about our growth initiatives. This goes all the way back to our S1 filing, which is connecting everyone around the world, a platform for everyone of all ages, Roblox everywhere and a vibrant economy. On connecting the world, just want to highlight, not just the growth in many really big future areas around the world, but also the monetization acceleration in these areas. Japan DAUs up 66%, hours up 64%, bookings up 174%. Germany DAUs 27% hours, 30% bookings up 75%. Brazil DAUs 23% hours, 23% bookings, 62%. And India, a huge opportunity for Roblox DAUs up 53%, hours 49%, bookings up 76%. We continue to also show great progress in our vision that Roblox is a platform for everyone, irregardless of age. On the DAU side in our 13 through 16 cohort, we saw a 22% growth, 17 through 24, 27% growth, and 25 and up 25% growth on the DAU side.

Hours, very similar growth: 13 through 16, 23%, 17 through 24, 29% and 25 and up, hours of engagement, up 28% year-on year. On our vision that Roblox is everywhere, and this goes to the vision that immersive 3D multi-player in the cloud simulation that connects and helps people communicate should run on every device. We brought forward two new devices recently. First, Meta Quest, which as of October 31st had over 2 million lifetime installs. And then, Sony PlayStation, which we announced at our Developer Conference and launched on October 10th, has had over 15 million downloads in October. Our goal is really for Roblox to be everywhere. On the size of vibrant economy, we’re innovating in many ways there, continuing to grow our monthly unique payers, we had 14.7 million average monthly unique payers in the quarter, which is a record.

We have some really exciting innovative extensions to the platform. Coming one is really in the vision of Roblox giving our developers and creators the tools to run their own business. We’re going to be introducing subscriptions for developers, so their experiences can host subscriptions, we plan on launching that this month. Advertising, we’re going to share a lot more at Investor Day. But we are making amazing progress here, we’ve hired Stephanie Latham as our VP of Global partnerships to help to supercharge this business. We’ve also in addition to portal and image ads started testing video ads in Q4 and looking for a launch of that in 2024, we’ll share more of this at Investor Day. On the overall product velocity and the background, we shared a lot of our 2024 vision at our Developer Conference in September.

And those videos are all available online for anyone who is interested. With a really strong pipeline of great innovation, on some of the big things we’ve been working around, which include voice and avatars simulation to more-and-more host real-time communication. Our voice DAUs for the quarter are now up 240% year-on year. On avatar side, we are now live with what we call UGC avatars, which is user-generated content for avatars, allowing the community to participate in the creation of avatars. And we’re now live with facial animation. And over time, we expect all avatars on the platform to support real-time camera tracking and facial animation. At our Developer Conference, we introduced a new platform called Roblox Connect, which is a showcase of communication technology that will be open source and shows us a set of APIs that allow creators to embed communication capabilities into their own experience, including on mobile, ringing the phone to join with friends.

And a couple of highlights, we’ll touch more on Investor Day. On the AI side, we continue behind the scenes to more and more incorporate AI up and down the stack. And in addition to, of course, added capabilities like Roblox Assistant, which we rolled out in October that you’ll hear more about on Investor Day and Roblox other ways of generating things. I think behind the scenes, I just want to highlight the efficiency that this is bringing us, both on safety, on moderation. We’re moving many of our moderation pipelines more and more to AI, and this is simultaneously increasing quality as well as cost, and you can see that in our increased operating leverage. Finally, just want to highlight that at Investor Day in a week, we’ll be covering a lot more of this.

And now, I’m going to pass it over to Mike for some more discussion on our operating leverage.

Michael Guthrie: Good morning, everybody, and thanks for joining. I think Dave did a great job of covering the highlights. I just want to point out that it was another quarter of very solid growth, and that growth was accompanied with a management of the growth and expense in our business. In particular, our fixed costs, which we’ve been talking about for the last few quarters, which are personnel costs and infrastructure costs. Both of those grew at a substantially lower rate this past quarter. And, infra and trust and safety grew at a lower rate than our bookings growth, which is something we had talked about and indicated what happened this quarter. So we’re quite happy with that. That provides quite a bit of operating leverage and we see that.

We’re now in a moment where we can see our operating costs growing at a rate that trails our top line growth, which is exciting and should provide healthy operating leverage in the future. We’ll talk more about that at Investor Day, I’m sure on this call. And at the same time, we’ve now completed our Ashburn, Virginia data center. And so, capital expenditures in the third quarter were down significantly from both last year and last quarter and we now have enough capacity to handle even significant growth in traffic all of next year, so substantially less capital expenditures in 2024 than you’ve seen over the last two years, which is a good setup for not just operating leverage, but also cash generation. Finally, as we mentioned in our shareholder letter this morning, beginning next year, in 2024, we intend to begin providing financial guidance.

Typically when we report our annual results each February, we will provide guidance for the ensuing full year and for the first quarter of that year. For each ensuing quarter, we will provide forward guidance for the next quarter and update our annual guidance. This is pretty standard and fare. Thus, on our Q4 earnings call next February, we will provide guidance for the full fiscal year of 2024 and for Q1 of 2024. In May of next year, we will provide guidance for Q2 of 2024 and update the guidance for the full year and so on. We will guide on revenue, bookings, net income and margins. We believe bookings provide the timelier indication of trends and our operating results that are not necessarily reflected in our revenue, because we recognize the majority of revenue over the estimated average lifetime of a paying user.

The change in deferred revenue constitutes the vast majority of the reconciling differences from revenue to bookings. Since our first quarterly guidance will be for Q1 of 2024, we expect a question today about our views on consensus numbers for Q4 2023, the last quarter for which we will not provide guidance. And since we haven’t provided any guidance information, we just want to reflect that based on facts that as of November the 7th, mean consensus for Q4 2023 is as follows: bookings of $1.065 billion; adjusted EBITDA of $173.2 million, which correlates to our calculation of covenant adjusted EBITDA; and revenue of $809.3 million. While we are not going to provide formal guidance for Q4, we are comfortable with the consensus estimates for bookings and adjusted EBITDA.

Concerning consensus revenue, we want to remind everyone that revenue is much more complicated to forecast and model than our bookings. Paying users can buy both consumable and durable virtual goods. Bookings related to consumable virtual goods are recognized essentially immediately, while bookings related to durable virtual goods are recognized over the average life of a paying user, which is currently 28 months. The split between consumable virtual goods and durable virtual goods changes every month. In addition, the average life of a paying user can also change in any given quarter. Finally, because of the deferral period, in any given quarter, the revenue recognized has much more to do with prior bookings than with current bookings. That’s for example, the growth in bookings over the past quarter will largely be reflected in our future revenues.

And just as an example, I went back and looked at our bookings in the supplemental materials. If you think about the 28 month average life of a payer, that’s about nine to 10 quarters. So if you look at the growth rate of bookings over the last nine to 10 quarters, you’ll see that it is — those growth rates are below the consensus revenue estimate, which is at about 40%. So we expect revenue in Q4 when we do the work on virtual versus consumable and the average life of a payer assuming there’s no change to that average life in Q4, we expect revenue in Q4 will be approximately $740 million to $750 million dollars or a year-over-year growth rate of approximately 28%. So with that, we’re done with our opening remarks and we welcome questions.

Operator: [Operator Instructions] Your first question comes from the line of Jason Tilshin from Canaccord Genuity. Please go ahead.

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Q&A Session

Jason Tilshin: Great. Good morning and congrats on the strong results. I was just wondering, exchange fees as a percent of bookings were down sequentially. I’m curious, if there’s anything one-time that drove that? And just higher level, how you view continuing to reinvest in the developer community as you see leverage [in other] (ph) areas? Thanks.

David Baszucki: Hi, Jason. We absolutely — top priority is to continue to invest in the developer community. In fact, the strong results that you’ve seen over the last few quarters is a direct result of an explosion of creativity, new content, existing content being updated and upgraded, appealing more and more to our user base. So top priority is to continue to invest in our developer community. The sequential decline is primarily related to an issue with our prepaid cards. So there was an ability, and we can go through this in more detail if you want to get on a call with us one-on-one, but there was an ability until recently to actually buy Roblox at a discount through prepaid cards and certain currencies and as a result the bookings number and the DevEx number was artificially inflated versus the bookings number.

The user was getting extra Roblox per dollar. We’ve now closed that and they’re now getting — they’re now buying Roblox at the right price. That means they get slightly fewer Roblox, which means the DevEx related to those bookings is slightly lower. But going forward that’s — that loophole effectively is closed and we will continue to be driving lots of opportunities for developers to grow the overall dollars in the system and the percentage of the economics that they get. And we’ll talk more about that at Investor Day. I’m happy to discuss it on this call as well.

Michael Guthrie: Yeah and we highlighted at our Developer Conference the growth rate of the top 10, the top 100, and the top 1000 developers and those all continue to grow quite rapidly as far as their revenue.

Jason Tilshin: Great, it’s really helpful. And just one quick follow-up. In the shareholder letter, you called out bookings growth really strong in Western Europe and East Asia. Just curious if there was any underlying drivers of that performance that stood out in the quarter? Thank you.

David Baszucki: Across the Western Europe and East Asia, we have a few benefits that are really pushing the bookings growth rate. Number one, we have payer cohorts that are getting, that are more and more seniority. And we know over time as payer cohorts are on the platform for longer periods of time, they tend to monetize better. And so, a lot of those payer cohorts are really hitting their stride in terms of maturity. Those are wealthy countries. So they have a lot of purchasing power. And so, we’ve done very well there. We have seen lots of new content that has popped up in those markets. And so, lots of growth there. And we’re really growing across all ages in Western Europe and East Asia, from all the way from the youngest users on the platform to aged up users.

Michael Guthrie: I want to highlight also core technology, less on the monetization side and more on the user engagement side is also underlying some of this. The quality of our platform in Japan has increased rapidly over the last few years. We highlighted semantic search and some of the other things we’ve been doing there. So this is also a result of product quality and the quality of our automatic translation system.

Operator: Your next question comes from the line of Bernard McTernan from Needham & Company. Please go ahead.

Bernard McTernan: Great. Thanks for taking questions. Maybe just to follow up on the last one, you guys have been talking about Japan for a couple of quarters now. Are there other kind of wealthy under-penetrated countries out there that is next on the list to target?

Michael Guthrie: Well, Germany, Spain, Italy, I mean all throughout Western Europe, France, they’re all growing really dramatically. And as you know, Bernie, it’s less about an immediate target and it’s more about an organic growth that’s driven, as Dave said, by great product technology, the fact that translation and search are better, the fact that there’s a local developer community sprouting up in those marketplaces. So it’s organic and we believe very sustainable because it’s organic. And so, we’re targeting really users around the globe, including more and more users in the US, Canada, and markets that we’re already very strong in. But the countries in Western Europe and East Asia just are showing particularly strong growth and very healthy monetization.

David Baszucki: And highlighting, when we talk about product quality in Japan, that’s platform-wide product quality, not Japan-only product quality. And that goes all the way down to raw product performance on low-end devices, for example, which can help accelerate countries like India. Search can help accelerate all countries. So really, we target the platform as a whole generally.

Bernard McTernan: Understood. And then just on the cost-saving initiatives and talking about internal efficiencies, especially in infrastructure, obviously you guys are doing a great job pushing on that. It feels like just from the shareholder letter, the commentary that there might be maybe more to do, you’re discovering that there’s more to do. Is that the right read, especially in infrastructure, just we see internal efficiency initiatives, it sounds like it might be a broader push than just growing it below bookings, but just want to double click on it.

Michael Guthrie: I want to highlight a couple efficiencies that we actually get from a quest for quality as opposed to a quest for raw efficiency. More and more as our safety platform moves to AI, it’s been driven by a quest for just increasing the quality of everything we do around safety and moderation. A byproduct of that is a lot of efficiency. I think on the infra side, as we get into a high level of resilience, that gives us a lot more room going forward to grow without a lot of CapEx. So some of these are less discoveries and natural evolution.

David Baszucki: And may just add Bernie one last thing to that. The growth rate that we had to build into through COVID was so significant that we made a decision to invest heavily and aggressively, and we’re happy that we did. And obviously the platform is at scale, the platform is much, much larger and much more capable than it was before. But now we’re sort of through that macro adjustment of hyper, hyper growth that the economy took when we started — when the pandemic started. It should be much more rational and reasonable and predictable growth. And that allows us to invest and be more efficient really throughout the income statement and the balance sheet.