Roblox Corporation (NYSE:RBLX) Q2 2023 Earnings Call Transcript

Roblox Corporation (NYSE:RBLX) Q2 2023 Earnings Call Transcript August 9, 2023

Roblox Corporation reports earnings inline with expectations. Reported EPS is $-0.46 EPS, expectations were $-0.46.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roblox Second 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. Stefanie Notaney, you may begin your conference.

Stefanie Notaney: Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox Q2 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, our expectations of 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 risks are described in our risk factors, including 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 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 as well as our supplemental slides. For our webcast participants, please note the question icon at the bottom right of your screen, where you can submit your questions. With that, I’ll turn it over to Dave.

David Baszucki: Thank you, and good morning, everyone. Q2 was another quarter of strong growth across all our key metrics, and we welcome you today. Bookings were $780 million, up 22% year-on-year. Our DAUs were $65.5 million, up 25% year-over-year. And our hours engaged in Q2 were $14 billion, up 24% year-over-year. We generated $28 million of operating cash, our cash is now north of $3 billion at $3.025 billion. We showed a GAAP loss of $283 million and covenant adjusted EBITDA at $37.9 million. These results powered by all of our investments in innovation. And as we discussed last quarter, we continue to be on track with our bookings growth and our expense control to generate positive operating leverage. We highlighted in the first half of this year that our bookings are growing faster year-on-year than our cost of goods sold.

We continue to expect in Q3 of this year that our bookings growth year-on-year will be faster than our infrastructure growth year-on-year. And we continue to expect in Q1 of 2024 that our bookings growth will be faster than our head count expense. We expect to return to double-digit covenant adjusted EBITDA margins in Q4 and 2024 as a whole. Let’s dive into the business. We’re driving continuously to our vision and mission of 1 billion daily active users and it’s part of our four-part growth strategy. I want to highlight some results in all areas, including international, all ages, really the utility of Roblox and driving towards a daily product for everyone and our economy and ecosystem. Let’s start with international. And I want to highlight that many of our huge international cohorts are really big and growing faster than our overall bookings and DAU rate.

Let’s start with some key geographies. Germany DAU’s 25% year-on-year growth. Korea, 34% year-on-year growth. Brazil, 38% year-on-year growth, India DAUs 40% DAU growth year-on-year and Japan, one of the largest consumer gaming market space is DAU growth of 107% year-on-year. A product highlight supporting this, we mentioned Semantic Search last quarter for Japan. We turned this on everywhere in Q2. This improved search for out of catalog searches and pop culture terms. And we’ve seen a significant increase in global click-through rate because of this north of 3%. We’re no longer talking about aging up. We are a platform for all ages. Our 13 and over cohort is 5 times larger than our under 13 cohort. And our 13-and-over cohort is growing at 33% year-on-year for DAUs. Our ’17 through ’24 cohort is growing at 36% year-on-year for both DAUs and hours.

And I do want to highlight that we introduced experience guidelines this quarter. You can read about it in our blog. Around the world, ’17 through ’24 and ’25 and up cohorts consistently show higher bookings per hour than other age cohorts. Let’s take a look at our Dev ecosystem. We are on track for our developers to earn $800 million in 2023. Our DevEx payouts in Q2 were $165 million, up 16% year-on-year. And I want to highlight the growing variety of content on our platform. In the last 12 months trailing, the 10 highest earning creators earned an average of $27 million each. These are growing and larger significant businesses but at the longer tail developer number 1,000 is now growing 2 times faster over the last three years, and is making $64,000 a year.

That’s thousands and thousands of people making it living on Roblox. And as far as content variety versus a year ago, within the top 150 experiences, we’re seeing 9% more variety of new experiences created in the last 90 days this year. Cool feature that we introduced for all Dev is product analytics. It’s ways for developers to monitor user acquisition, performance, benchmarks and I want to highlight, in the last six months, use of analytics by the top 10,000 devs has gone from 22% to 40%. We think this is a good signal. This is 10,000 developers with 40% of them paying deep attention to analytics to help, we believe improve the quality of their experiences. For those that are deep into our ecosystem, I want to highlight that the anti-cheat technology we acquired from Byfron is live now.

It’s made a significant impact in the quality of experiences on our Windows platform, where a lot of our more serious gamers are playing and really significantly reduced exploits and bought activity. As we’re moving towards our vision and mission of connecting 1 billion people daily. We’re making significant advancements in our products to make Roblox a daily utility. And I want to highlight, we believe we have significant headroom even in our core market where we got our start, which is USA 9 through 12. Highlight, we introduced Meta Quest on beta. We saw a 1 million downloads in the first five days on that platform and it highlights our vision of Roblox being available everywhere, and it highlights the vision that when a creator makes an experience on Roblox, it immediately runs on all platforms and is immediately dynamically translated into all languages.

We believe that’s part of the DAU growth we’ve seen around the world. Getting into utility, high-frequency communication on our platform. In the U.S.A., we now have 12% of our 13 and up daily actives using voice and 2 million voice DAUs worldwide as of the end of Q2. This is a 30% growth over the last six months. And we have strong evidence that as people become more immersed with voice, it has uplift in key metrics, both on our spend and on Roblox. Facial animation, we just turned on for 100% of voice users. I want to highlight this, coupled with voice, we believe makes Roblox communication much more connected and realistic. And we also turned on animated heads for everyone using voice. We have some great stuff coming on animation as well.

On the social side, I want to highlight, we’ve been hard at work improving the way people connect and the way real life friends connect and we’ve seen a 9% year-on-year growth in real life friending in the first week, which we feel is significant. And once again, strong directional evidence that this benefits retention. On our economy, we’re creating products and systems to build a vibrant economy and empower our creator community to offer them more ways to earn and be discovered. Advertising is now live in its early form. I want to highlight some key things there. We have promoted Christina Wootton to Chief Partnership Officer, to help drive our connection with brands. We’ve now done over 200 brand activations on the platform and we’ll make revenue this year in advertising.

We’re going to share at Investor Day in November, our expectations for this for 2024. But I do want to highlight that on the supply side now, 19% of the top 100 experiences on our platform have ad units. And this has been added organically by the creator community and I also want to highlight that there are areas already where we see strong demand and more demand than supply for advertising on the platform. Want to welcome some of our advertisers that are live, including NARS Cosmetics, H&M, Spotify, NASCAR and iHeartRadio. I’m really excited about really, the vision that we’ve been talking here that this is a new form of immersive advertising. This is a form of advertising that actually allows people to go to an immersive experience and experience of brand.

Highlighting that we are on track on our UGC economy to get to full avatars throughout the ecosystem by the end of the year. We think this is going to significantly change the look and feel of Roblox, really looking forward to that. Also, just highlighting on search and discovery on the efficient frontier. In Q2, we’ve been able to increase both the impact of bookings and the engagement on our search and discovery system at the same time, which is what we’ve been talking about doing for a while. Let’s talk a little about AI and just how big it is for a platform like Roblox. We have approaching 14 billion hours of engagement on Roblox in Q4. There are many, many, many areas that we’re already live on the platform with ML and AI stacks and more to come.

I want to highlight that we have 70 machine learning training stacks right now. We have trained, for example, our own translation model with 1 billion parameters. This is the model that helps auto translate all experiences when a creator makes them. And the range of verticals that we have live right now, we’ve mentioned material generation and code generation have shipped. We mentioned that we’re making really impressive gains in both quality and cost throughout our safety systems on all types of assets, which is live. We’ve mentioned that we’re building our own model internally and running our own inference on voice, safety, internally on search, we’re live, and we have a lot of 3D generative coming as we move to creation everywhere and our avatar project.

I want to highlight two key things on our platform. First, we’ve got approaching 5 billion hours of human interaction on our platform every month. And this human interaction can help us and does help us reinforce the quality of our stability system. We believe long term that on our platform because we can run infrastructure, inference on our own infrastructure, there’s an amazing opportunity to run inference all over the platform and run it at extremely low cost. I’ll give you an example. Our personalized recommendations right now, a 100% of these are running on our own infrastructure, running inference and doing it really cheaply at scale. Also, all of our safety pipelines, image, audio, voice, text, and 3D are running on our own platform, doing inference on our own platform at significant efficiencies of cost and driving quality there.

Longer term, look for us to build bigger and more sophisticated models, first around voice, text and language supporting safety and stability, look for bigger and more interesting advanced models for us for 3D generation and ultimately, look for models from us on general human simulation and PCs. Once again running at extremely high performance and low cost on our own infrastructure. Finally, just to cap it off and then we’ll start taking questions. We do have a research group that is producing some really high-quality technology that we will be wrapping into our product over the next two to four years under Dr. Morgan McGuire, checkout research.roblox.com, Manish Agrawal just published a great paper on adding conditional control to text damage diffusion models.

And 2023, and you can see all of what we’re doing there. With that, thank you, and we’ll welcome questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Andrew Crum from Stifel. Your line is open.

Andrew Crum: Okay. Thanks, guys. Good morning. So Dave, I think in your prepared remarks, you made a comment that the company is on pace to pay out $800 million in developer exchange fees this year, that would imply an acceleration in the second half over the first half against conceivably a deceleration in bookings growth. I just want to make sure those assumptions are correct and what’s driving that uptick in the second half? Thanks.

Michael Guthrie: Hey, Drew. It’s Mike. Generally, back half revenue in our business is higher than the front half of the year. It’s pretty simple. So it’s straightforward. You know what the — roughly what the payouts are and so that’s what’s driving the $800 million number.

Andrew Crum: Got it. Okay. And then just a quick follow-up. Can you address your plan to enable developers the ability to offer subscriptions within their experiences. Any sense on timing and if or how, Roblox would share in the economics of the accompanying bookings that are generated through subscriptions? Thanks.

David Baszucki: Yeah. So, hi. Thanks for highlighting this Roblox way of thinking about things. A lot of our developers would like to offer VIP subscriptions directly for their experience. We are working on it. We plan to support this. We’re not going to give a date or a time. We do think it will be significant and we do think it will interact with subscriptions on the platform and recurring revenue.

Andrew Crum: Thanks, guys.

Operator: And your next question comes from the line of Eric Handler from ROTH Capital Partners. Your line is open.

Eric Handler: Yes. Good morning. Thanks for the question. Wonder if you could talk about what the impact has been on British (ph) cohorts for now having 17-plus rated content?

David Baszucki: I want to share that it’s early. That said, we have started to see some organic traction, which is just the same as we’ve seen in all areas. We have started to see developers build specific 17-plus experiences, and they’re starting to show up in our sorts (ph). We think this is going to continue to grow and get bigger, but you can check it out on the site.

Eric Handler: Great. Thanks. And just as a follow-up, with advertising begin to roll out now, how are you pricing the inventory?

David Baszucki: Yeah. This is really exciting. We’ve been a little gentle on the pricing right now. We’re going to — we expect at some point in the future to float the price. And when we do this, we will see the true value of what we believe is an extremely new and valuable ad units which is a teleport into an immersive experience. This is a new ad unit, unlike a video ad unit, unlike an image ad unit. It’s literally moving real-time people on Roblox into one of our partners’ experience, and we will self-discover that in the free market as we float pricing.

Eric Handler: Thank you very much.

Operator: And your next question comes from the line of Clark Lampen from BTIG. Your line is open.

Clark Lampen: Thanks. Good morning. I have two. Dave, I want to start with some of the AI commentary you made in the shareholder letter. Understanding that it’s an accelerant creation across the platform. I think the consequence from a user side seems fairly obvious in terms of the overall experience improving. But as we think about the developer side, how does that increase sort of, in volume and velocity of content creation impact developers? Does it make it a more competitive ecosystem? And if it is, is there a need to, I guess, sort of offset that with potentially higher developer distribution rates over time.

David Baszucki: We think that — I mean, we’re entering an exciting new period on our platform. You highlighted that for users traditionally when users create immersive 3D content or social content. They’re used to doing it with graphics tools and 3D type creation. We think experiences, for example, a fashion design experience is going to migrate all the way from using a virtual sewing machine and scissors to purely based text prompts. And ultimately, we’ll enter an age on Roblox where anyone can make their avatar or clothing 100% through text prompts. So if I or you wanted to build a piece of clothing, we could describe it. We’re going to see that created in real time. We think for developers, this is going to accelerate quality up and down the stack.

There’s a great video clip. We’re not going to claim when we will achieve this on West world, where there’s a text braced interaction of 3D creation and we do think that’s the product vision where developers will have all tools at their disposal. We’ll see a greater diversity of experiences. We will see people who before didn’t expect to be creators making immersive 3D experiences. And we’ll see the ones that are created by developers become more rich and dynamic. We may ultimately even see experiences that are dynamically personalized for each individual player. So it’s really early, but we think it’s a really exciting frontier for 3D creation.