Roblox Corporation (NYSE:RBLX) Q4 2023 Earnings Call Transcript

Roblox Corporation (NYSE:RBLX) Q4 2023 Earnings Call Transcript February 7, 2024

Roblox Corporation beats earnings expectations. Reported EPS is $-0.46, expectations were $-0.57. Roblox Corporation 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 Dennis, 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 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] I would now like to turn the conference over to Stefanie Notaney, Senior Director, Financial Communications. You may now begin your conference.

Stefanie Notaney: Thank you, Dennis. Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox’s fourth quarter and full year 2023 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 risks, uncertainties and assumptions are included in our SEC filings, including our most recent reports on Form 10-K and 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 the call over to Dave.

David Baszucki: Thank you. Hey, welcome everyone to our Q4 and full year 2023 earning call. It’s great seeing or hearing or talking with all of you, and it was great seeing you all at Investor Day. We had a strong fourth quarter and a strong full year 2023, consistent with the outlook we made at Investor Day. Some highlights in Q4 are: DAU 71.5 million, up 22%; hours engaged 15.5 billion, up 21% year-on-year; revenue $749 million, up 30% year-on-year; and bookings $1.1 billion, up 25% year-on-year. It was our first quarter over $1 billion in bookings and also our highest quarterly growth rate in two years. For the full year and fiscal year 2023, DAU is up 22%, hours up 22%, revenue up 26% and bookings of $3.5 billion, up 23% year-on-year.

We continue to invest in innovation and simultaneously invest very thoughtfully in the growth rate of those investments. And at our Investor Day, we discussed thoughtfully balancing the growth rate with our investments both in cost of revenue, infrastructure expense, people and capital expenses. And we’re pleased to share that, in Q4, we delivered net cash flow from operations of $143 million, up 20% year-on-year, strong net liquidity of $2.2 billion, and our covenant adjusted EBITDA was $259 million. Mike will talk more about the balance of our investments and the management of our margin targets. I want to highlight going all the way back to our S-1, our four-dimensional growth strategy, including all ages, international, Roblox everywhere and a vibrant economy.

See also Top 20 Most Innovative Economies in Asia and 15 Highest Quality Bed Sheets of 2024.

Q&A Session

And in all four of these dimensions, we made great progress. On all ages, our 13-and-over DAUs grew 28% in the last quarter and over 58% of our DAUs are now 13 and up. And these older DAUs are interesting and exciting for the advertising business that we’re building. Our growth continues to be the result of innovation and investment in the platform as well as our amazing creator community. On the international side, DAUs in the US and Canada grew 17%. DAUs outside of the US and Canada grew 23%. A couple of highlights in Q4, Japan DAUs 45%, India Q4 DAUs up 59% year-on-year. This growth, we believe, is supported by our international expansion playbook, including a foundation of safety and civility, automatic AI-powered language translation. So, all of the content our creators create can run around the world.

Our infrastructure, including edge data centers around the world to supply performance and reliability, great content developers popping up all around the world and continued innovation here. On Monday, we announced that our own AI model is powering real-time AI chat translation, allowing people around the world to communicate with people who are chatting in a different language. On Roblox everywhere, in Q4, we released Roblox on PlayStation and on Meta Quest. Both of them attracted new users and continued on our vision that we want Roblox everywhere. In our vibrant economy expansion, in Q4, we delivered developer subscriptions. We’re moving consistent with the vision of everything is creator-driven, our avatar platform to full UGC. And quick update on our advertising initiative.

We had the most brand engagements ever in Q4, 69 great brands working with the platform, and we’re scaling up over 2024. A couple of highlights on innovation that we’re building on top of all of this. On our social side, we’re connecting more friends all the time. We released real names for 17 and up players. We released video capture — sorry, image capture now. We hinted where we might go there someday. On the immersive communications side, we saw great growth in our voice DAUs. Voice DAUs are up 161% year-over-year, which is just highlighting our vision of Roblox connecting and really acting as a connection and communication platform. On the avatar front, we continue to make progress in immersive connective avatars in addition to layered clothing we released this year, and we’re seeing more penetration on facial animation everywhere.

We are seeing more penetration on voice chat. And a hint of what’s to come at our Roblox Developer Conference, we hinted around the use of our own AI to generatively create avatar. The AI opportunity at Roblox is manifest and everywhere. We’ve been working on this behind the scenes for many, many years. On the more visible generative side, we have announced Roblox Assistant, which is now in beta where creators can use natural language text prompts to generate new ideas in addition to code assist and material assist. Behind the scenes, we continue to roll out more and more AI on real-time image, voice and chat moderation, which in addition to constantly improving quality is also making our whole safety platform much more efficient. Looking forward, we will continue on our path of innovation and execution.

Consistent with what we shared with you at Investor Day in 2024, we are driving growth and engagement in DAUs. We are relentlessly focusing on the leverage we gain from raw performance, quality and cost to serve efficiency. We are focused on accelerating monetization through advertising and our virtual economy. We are using AI both in, once again, the user-facing generative way to accelerate creation and expression, but also behind the scenes for cost and quality. And underlying this always since day one is our focus on safety and civility from the start of our platform to really this day forward. And we continue to be optimistic about our mission to connect 1 billion people every day with optimism and civility, not just in gaming, but in entertainment, ultimately in shopping, ultimately in social communication, and ultimately in learning and education where we’re making amazing progress as well.

With that, I’m going to pass it over to Mike Guthrie, our CFO.

Mike Guthrie: Thanks, Dave, and good morning, everyone. Just a few quick comments before we open it up to your questions. So obviously, we’re pleased with the ’23 results. I’m going to reference our supplemental materials, which are on the IR website, ir.roblox.com, and some of the charts there. So, on bookings, as Dave said, Q4 $1.127 billion, that’s 25% growth year-over-year, strength across all geographies, which you can see on Page 18. Expense growth, in particular, compensation and infrastructure are two big fixed costs. On Pages 12 and 13, you can see are growing at a slower rate than bookings growth and that’s yielding healthy operating margins and more cash flow from operations. Cash from operations on Page 19, you can see the growth there, and how we saw good growth year-over-year both in Q3 and in Q4.

And then, reduced capital expenditures are yielding significantly higher free cash flow. I want to now address some seasonality, which I think will help people with their models. We’re really starting to see good seasonality in the business and really in ’22 and ’23, we’re through COVID comparisons and so you can really start to see things more clearly. On bookings back to Page 17, normally Q1 is down from the Q4 of the prior year, the holiday season. Q1 and Q2 are pretty similar in terms of overall bookings with a slight uptick in Q2. And then, we see very good sequential growth in Q3 with the summer, and then a big sequential jump in Q4 for the holidays and then again back down a little bit in Q1 of the next year. So that’s normal seasonality on bookings and you can really see that.

On Page 19, you can start to see our cash flow from operations and the seasonality around cash from operations. Let me just talk a little bit about that. Note that Q1 is normally the highest cash from operations rather than Q4, which is the highest in bookings. And the reason for that is simply working capital. We had a working capital buildup in Q4 when holiday bookings are the highest, and then there’s a big release of that with post-holiday collections. And so, Q1 tends to be our highest cash flow from operations. On Page 36, looking at covenant adjusted EBITDA, it’s a little bit different than cash from operations because the difference is actually that change in working capital. And therefore, the seasonality around covenant adjusted EBITDA tracks much more with normal bookings.

So Q1 is lower because we don’t have the working capital benefit. Q2 goes down a little bit because we tend to grow the top-line, but also invest a little bit, and we have some amount of fixed cost growth. And then, Q3 and Q4 covenant adjusted EBITDA tends to pick up with growth in summer bookings and then, of course, hits its peak in Q4 with peak holiday bookings. And free cash flow, we’ll start to see more seasonality — normal seasonality as long as CapEx sort of matches and flows throughout the course of the year, which we think it will. Some other quick callouts, Dave talked about DAU growth and hourly growth, great numbers, both overall and across all geographies and with older users. I do want to call out monetization. Our bookings per DAU, which you can see on Page 26, was up 3% overall, and, on Page 27, was up across most of the regions around the world.

And then, on Page 28, monthly unique payers hit an all-time peak in the fourth quarter. And a big call out, bookings per monthly unique payer was the highest of any Q4 and actually, of course, the highest in the history. And that number was up nicely over the same number this time last year. Our share count grew by about 3.7%. Let’s talk a little bit about guidance and then we’ll open it up to your questions. We are obviously guiding to GAAP revenue and GAAP net loss. These are going to be a little bit difficult for you to get exactly right because of the waterfall of the deferred and the factors that go into determining that number. So, those are the natures of goods purchased whether it’s a consumable or a durable and then the life of a paying user.

We’re also guiding on a non-GAAP basis to bookings and adjusted EBITDA. Now you’re all familiar with bookings. This quarter, we’re guiding to adjusted EBITDA and that calculation differs from what most of you refer to as adjusted EBITDA in your Roblox models. What most of you are referring to is covenant adjusted EBITDA. So just to clarify again, the difference between covenant adjusted EBITDA is calculated by adding back that net charge of deferrals. And so that’s what most of you are modeling to. So, when you see the adjustments and you’ll see in our releases, you have to add back the deferred to get what’s in your models as adjusted EBITDA. Margin guidance, about 100 basis points to 300 basis points. We talked about this at Investor Day, that means year-over-year by quarter and for the full year.

So, when we have variance in margin, that’s okay, just we’re going to show margin improvement in each of those quarters and then overall. So for example, many of you in your margin expectations for Q4 were at about 18%. We generated about 23%. And for us, that compares to 20.3% last year. So, it was about a 270 basis point increase in the fourth quarter. And then, for the full year, consensus estimates were about 10% for ’23. We produced 12.3%. So that’s about 230 basis points of improvement. Now, for the full year and then I’ll stop and let you ask questions. For the full year, the midpoint of our margin guidance would suggest 13.4% or 110 basis points higher than where we were last year, and the high end implies about 14% or 170 basis points.