Roblox Corporation (NYSE:RBLX) Q4 2022 Earnings Call Transcript

Roblox Corporation (NYSE:RBLX) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roblox Fourth Quarter and Full Year 2022 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. Thank you. Stefanie Notaney, you may begin your conference.

Stefanie Notaney: Thank you. Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox’s Q4 and full year 2022 results. With me today is Roblox Co-Founder and CEO, David Baszucki; and CFO, Mike Guthrie. Before we begin, I want to remind everyone that earlier this morning, we published a shareholder letter and earnings results 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. For our webcast participants, please note the question icon at the bottom right of your screen where you can type in your questions. We’ll do our best to take as many questions as possible in the time we have allotted today.

On today’s call, we may be making some forward-looking statements, including but not limited to our expectations of our business, future financial results and business, and financial strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements, and such risks are described in our risk factors, included in our SEC filings, including our annual report on Form 10-K and quarterly report on Form 10-Q. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update any forward-looking 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 for our reported results can be found in our press release issued this morning as well as in our supplemental slides, copies of which can be found on our Investor Relations website. Finally, this call is being webcast. The webcast will be archived on our IR website shortly afterwards. With that, I’ll turn the call over to Dave.

David Baszucki: Thank you very much, and welcome team. Welcome, Mike. It’s a pleasure to be here. Welcome to the Roblox community, and welcome to all of our investors. We continue to focus on innovation, and we’re very pleased with our results from Q4 and the early signal on January. We have enormous headroom in our business. We have the whole company focused on one product one platform. And in the midst of a fair amount of turmoil over the last year, we continue to hire and build an amazing team with amazing people. We’re focused on our four growth vectors. One is bringing people together all around the world. One is expanding our platform to encompass people of all ages. Third growth vector is we continue to see expansion into education, into concerts, into communication.

And finally, our economy is vibrant and growing as we’ll share in our call. A couple details, Q4 bookings, $899 million, up 17% year-over-year, or 21% on constant currency and highlighting this is around the world, including U.S., Canada and APAC each at 19% growth in Q4, some slight acceleration in 2022 going into 2023 with December 20% year-on-year, January 21% year-on-year. And this is highlighting our global growth in January with Europe and APAC up 29% year-on-year. For older users, which is an enormous opportunity for the platform sometimes referred to as aging up, this is not a new thing for us. We are in the middle of aging up. And in January, we saw our 17 through 24 year old segment grew at 39% year-on-year for bookings. Going into usage and DAUs, we’re proud to report that in January we had our highest ever DAUs at 65 million DAU and Q4 DAUs continue to show really strong growth: Europe 24%; APAC 21%, U.S. and Canada up 19% in Q4 DAUs. Amazingly, well, not really amazingly because we’re so focused on innovation, we burned almost no cash in 2022, roughly negative 0.5% cash, which we’re really, really proud of.

And on an adjusted basis, in Q4, our EBITDA was $183 million or 20.3% of bookings. I want to highlight that underneath all of this progress, we focus very heavily on key drivers around sign-ups, retention, frequency, engagement and monetization. And all of these numbers continue to be near or at all-time highs, even as we’ve emerged from COVID. Long-term, we remain singularly focused on ushering in this new category of immersive communication. And we continue to see what we believe are the benefits of this new category as we start to rollout voice and facial animation, including the ability for people to be virtually in the same place as they communicate the ability to pick up many queues around human interaction, including eye tracking, arm tracking, which we don’t sometimes pick up on the phone or on a video call, the ability to stimulate more and more of the audio that we see in the real world that helps our communication.

And finally, of course, what everyone does on Roblox in addition to communicating doing things together. This vision we think has enormous headroom for us. If you’ve been with us on our Investor Day or some of our calls at RDC, we believe this is the next generation of communication following from audio phone, video calls, texting, messaging. Behind the scenes on our innovation stack, there is a lot of metrics that are moving that to our average user are invisible, but are very, very important and go side by side with our innovation. We’re constantly making improvements in the performance of all of our apps in the speed at which people can connect to Roblox experiences in the performance of our cloud around the world and the performance all around the world as we roll out new edge data centers.

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And of course, the more visible parts of our innovation continue to be visible as well. We continue to roll out voice. We’ve had over a million experiences, so far enabled voice chat. And as we continue to roll this out, we’re very pleased with the adoption and the level of immersiveness that this has brought. We talk about dynamic heads and facial animation because we’re in the middle of this rollout. But we believe very soon we will assume this is just a core part of Roblox and we will stop referring to dynamic as it will just be part of an active avatar. This is the same with layered clothing with over 100 million €“ 115 million people adopting layered clothing so far. This will transition to just being called the clothing system on Roblox.

And finally, we’re well on our way. I believe we’ve passed 90% of our catalog now being UGC. We’re well on our way to that being 100%, including all of the avatars on the system as well. And finally, we’re really pleased from the safety and stability standpoint to roll out experience guidelines in Q4, which is really discontinuing our vision of building a platform for all ages around the world. Our active developers are up 33% year-on-year. We’ve had 70 experiences now past one billion visits at the end of 2022. Brands continue to come to roadblocks as this is a new form of bringing people together with brands. We’re proud to welcome the NFL, FIFA, Netflix and of course, Elton John, Mariah Carey. We have a lot more coming in 2023. And something really near and dear to my heart, just given my prior company was an educational software company, we’re really proud to see institutions like the museum of science in Boston, start to roll out large immersive educational efforts such as their mission to Mars Roblox interactive experience.

Finally, safety and stability is a foundation for us, and we were really pleased be the first tech company to support the landmark child safety legislation in California last year called the California Age-Appropriate Design Code and we’re hopeful more states will adopt it. With that, we’ll either turn it over to comments and let Mike have something to chime in.

Mike Guthrie: Yes. Thanks, Dave. I just want to add a couple of thoughts before we open it up for questions. As it relates to cash flow, as Dave mentioned, we did continue to take an investment posture this year, we’re really happy to see high returns on those investments and to see margins coming back into the business, really driven by top line growth. We spent over $400 million over the course of the year, investing in infrastructure, primarily related to our data center in Ashburn, Virginia, and still we’re able to run the company effectively cash flow neutral for the year, which was a goal of ours internally. Those capital expenditures related to infrastructure will be down significantly in 2023, somewhere between 25% and 30% lower this year.

Dave also mentioned our focus on frequency, engagement and monetization. I also just want to point out, we had incredibly strong results and you can see it in our supplemental materials around payers on the platform. So in the fourth quarter, we reached an all-time high of 13.4 million payers, highest amount of returning payers that we’ve ever had, which means, obviously, people are sticking with us, which is great. And we added more new payers than ever before with the exception of the very first quarter of COVID. So we had incredibly strong growth in payers. And at the same time, the monetization prepare in the fourth quarter was up significantly and as strong as it’s ever been. We’re also seeing very, very healthy what we refer to as payer conversion.

So more users are becoming payers than ever before, and that’s pretty much true across the globe. Each individual region is reaching its peak in payer conversion. They did at least over the holidays. And so when we look at that on a seasonal basis, that looks very strong. So again, as Dave mentioned, a great end of Q4, a nice start to 2023 and why don’t we pause there and open it up for questions.

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Q&A Session

Operator: Your first question comes from the line of Omar Dessouky with Bank of America. Your line is open.

Omar Dessouky: Hey guys, thank you for taking the question. Everybody is talking about ChatGPT; it’s being asked of all the big companies. So I wanted to ask, how does the availability of this new technology maybe accelerate or not your time line towards inexperienced creation tools? And what proprietary data sets do you have that could break through €“ domain-specific €“ that could create breakthrough domain-specific applications using the GPT3 models?

David Baszucki: Great question. And this is a wonderful area. There is going to be a block post from our CTO, Dan Sterman, coming out tomorrow sharing really the wide range of opportunities that you could imagine ML will accelerate and stuff we’ve been working on for quite a while. Going through the whole Roblox virtual universe, we can, of course, imagine code acceleration and the amazingly large data set of Lua code that all of our creators have built on the platform that sits in our cloud that we can accelerate. Of course, we can model, imagine 3D model acceleration and something very near and dear to the heart of every player on Roblox is their own personal Avatar. Traditionally, Avatar have been created in many, many ways, including mixing and matching parts, moving sliders, but we’re going to see more and more a range of innovation around Avatar creation that’s much more natural and natural language-based creation.

And behind the scenes, in addition to this, there is another wide range of opportunities around customer service, around how NPCs perform around the performance of search and discovery, around the creation of 3D materials. So there’s many, many ways we’re going to harvest and tap into ML here. We have a lot of data and feedback from our users. And stand by, and read more, please, on Thursday.

Omar Dessouky: That’s wonderful. Okay, we’re looking forward to that, reading that blog. I guess first for a follow-up and a separate question, you’ve talked about the kind of transition, you’ve talked about the transition to a limited items, economy and exclusively limited items, economy on Roblox. I just wanted to hear how your thoughts have evolved on that and what you see timing might be, whether that would be phased or if it’s already in progress and when it would kind of be complete? Also, I guess, as part of that process, will you still be having items created primarily by UGC creator program? Or will it become open by the time of the completion to the general public and the general user base?

David Baszucki: I will share the long-term vision. You are going to see pieces of this rollout throughout the year. With long-term in the real physical world, there’s no constraints on who can create the items that we use in our everyday life. New people can enter that market at any point in time. And we have a wide range of pricing and activity in the real world. We have generic items like white T-shirts, we also have very expensive items like Gucci purses. We’re working as quickly as we can to mimic the range and expressiveness of the commerce we see in the real world and potentially go beyond that. So this is actively under development. We’re moving to a UGC economy where there is no limits, where everyone can participate and where robots doesn’t make everything €“ anything really our community makes all of it, where the economy is very vibrant where more and more creators can make a living, creating items on Roblox, and we have a wide range of pricing that makes economic sense.

So, look for more and more things during the course of this year and more and more innovations that mirror how the real world economy works in a virtual world like Roblox.

Mike Guthrie: Thanks, Omar. We’ll catch up with you in about an hour. We’re going to move to the next caller if that’s okay.

Omar Dessouky: Thank you.

Mike Guthrie: Thanks.

Operator: Your next question is from the line of David Karnovsky with JPMorgan. Your line is open.

David Karnovsky: Hey, thank you. Dave, on the prior call, I think, you mentioned that 17- to 24-year-old users were mostly monetizing in the top experiences, but we’re experiment in the aged up experiences. So I wanted to see if you could update on this, whether those older users are starting to migrate further into the mature content and what opportunity sets for next year? And then, Mike, just on expenses, there was real moderation in cost growth quarter-over-quarter for R&D and infrastructure. Just wondering if you could kind of discuss how you’re thinking about investment for those OpEx lines in 2023. And if that growth pace we saw in Q4 is kind of reasonable to assume going forward. Thank you.

David Baszucki: I’ll give a general highlight. When we say mature experiences on Roblox, as of now with our experience guidelines, we do not have any 2017 enough experiences. So the experiences on Roblox are nudging in that direction. We are seeing more and more things that I would say are exciting for older players. It’s interesting that the core genre in Roblox has really perked up in the last three or four months’ experiences like doors and others have become very, very popular. Many of the experiences on Roblox even for all their players cover all age ranges as well. And just as in the very early days of Roblox, we saw the market really respond to the opportunity of that player base. We’re seeing that with our game fund as well. So there’s more and more aged up content showing up on the platform.