Roblox Corp Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Roblox Q3 2021 Earnings Q&A. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. I will now hand the conference over to your speaker today, Anna Yen, Head of Investor Relations. Thank you. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox’s third quarter 2021 results. With me today is Roblox CEO, David Baszucki; and CFO, Mike Guthrie. Before we start, I want to remind everyone that yesterday aftermarket close, we published a shareholder letter and earnings results on our Investor Relations website at ir.roblox.com. Since the letter provides a lot of details, 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 of your screen where you can type in your questions. We'll do our best to take as many questions as possible. On today's call, we may be making forward-looking statements, including but not limited to, statements regarding our future financial performance, business strategy, plans, and new platform features; development of new technologies and developer tools; investment in the developer community and our talent; payments to developers; our ability to bring new music, recording artists and brands to the platform; the success of events on the platform; investments and international growth; the development of the metaverse; Investor Day; and October financial performance and operating metrics. Any statements that refer to expectations, projections, or other characterizations of future events, including financial projections, future market conditions, where the impact of COVID-19 on our business and the economy as a whole is a forward-looking statement based on assumptions today. Actual results may differ materially from those expressed in these forward-looking statements and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued yesterday, as well as risks described in our filings with the SEC, including our quarterly report on Form 10-Q, filed for the fiscal quarter ended June 30, 2021, and other filings and reports we may make with the SEC from time to time. We will also discuss certain non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued yesterday, as well as in our supplemental materials, copies of which can be found on our Investor Relations website. Finally, this call is being webcast and will be archived on our website shortly afterwards. With that, I will turn the call over to David.

Thank you, Anna, and good morning to both our Roblox shareholders, as well as the whole Roblox community around the world. We wish you all well. We hope you are all coming out of COVID and getting back to normal as much as possible. And we look forward to answering your questions today where we will talk about our Q3 results, as well as the month of October, which we've also shared. I do highlight that in a week from now on November 16, we have a live streaming Investor Day at 8 AM Pacific Time, where we'll be spending several hours diving into our product stack across the Company. With that, we welcome your questions and look forward to speaking with you today. Thank you.

Operator, we’re ready to take questions.

Your first question will come from the line of Alexia Quadrani with JPMorgan. Please go ahead with your question.

Thank you. This is David Karnovsky on for Lexia. Following the outage, can you say what user trends look like on the platform? Did you see an immediate recovery in engagement and spending? And then, maybe related to this, could you just remind us of a typical monthly cadence in Q4? How does November compare to October, and then kind of how much of a ramp do you historically see with the holiday period?

Yes, this is Dave. I'll lead with the outage, which was an event that we're going to publish an analysis of publicly to share what happened, as well as all the steps we're taking to make sure such a thing doesn't happen again. We were quite gratified to see the support of the Roblox community as we worked through it. And we're also quite pleased to see when we came back live, essentially no loss of users and continuation of our user trends. I'll pass over to Mike for any future comments.

The first week of November looks very promising. It was essentially a return to our previous levels. We were fortunate not to experience any lasting impact on our user base, which was reassuring. Regarding seasonality, the fourth quarter typically represents our largest quarter, especially during the holiday season, so this is not unexpected. October and November usually show similar patterns, and we anticipate a significant uptick around Thanksgiving when people tend to spend more time at home. Overall, we had a solid 27 days in October with positive trends, and as we resumed operations, it appeared that users returned at the same pace.

Okay. And then with the platform now majority 13 plus per DAUs, I'm wondering if you would expect the percentage of experiences that qualifies aged up to move to that level over time. Meaning, are you seeing developers sort of react to this mix and build more mature content? And then, how much do you think that can accelerate with tools like voice chat or the rating system you previewed at RDC?

Hey, this is Dave. We have been building this platform for over 16 years. One of the key aspects is that it's powered by user-created content, with millions of creators contributing to everything on Roblox. As we have grown and improved the quality of our personalized search and discovery, more users on our platform are finding amazing content that aligns with their interests. Our creator community is very responsive to the needs of the player community. Recently, about 10% of our top thousand experiences had more than 13 players, and that number has now increased to 28%. The developer community is actively creating fantastic content for all ages, appealing to people around the world with diverse interests. What we hoped to see is indeed happening.

Thank you.

Our next question will come from the line of Mike Ng with Goldman Sachs. Please go ahead with your question.

Hey, good morning. Thanks for the question. I just have two. First, with APAC and Rest of World particularly strong from an engagement perspective, I was just wondering if you could talk a little bit about any initiatives that Roblox is executing against from an international expansion perspective. And whether there are any experiences that particularly resonated with the international users. And then I have a quick follow-up. Thanks.

Yes, I'm going to kick that over to Mike first because we had a great Q3 and APAC highlighted by Japan. So maybe Mike, if you want to speak to that, and then I'll follow up with what we do to support international growth and acceleration.

Yes, I don't think we could point to any specific piece of content that is dramatically different in Asia-Pacific. Generally, we have a decent amount of overlap around the world. We are seeing an increasing amount of affinity for local content in certain markets. As developers are growing in and around Asia-Pacific, they will start building, or have started building content that is relevant globally and relevant in those local markets. There is no specific spike this quarter. I think it's just a much longer-term trend that we've seen developing as the dev base has become more global. We'll talk a little bit about this at the Investor Day next week. But it's just a good solid compounding of the trends that we've been seeing of local content becoming of a more content developed around the world and some of the affinity for local content increasing.

And then one thing that drives our international growth is the extent to which we can dynamically and automatically translate experiences as they are created. The extent to which developers, if need be, supplement that with hand translation, and that technology is continuously improving both the quality of the translation, as well as the percentage of the experiences that by default have this on. So that is a contributing factor more in strategic international growth.

Great. Thank you for the thoughts. And I was just wondering if you could talk a little bit about the traction with brand experiences. You mentioned Vans World in the letter, are these brands participating on the platform in the same way that others do in a UGC or self-serve capacity? Or are brand experiences higher touch right now? And does that change over time? Thank you very much.

Yes. This is Dave. Long-term, the vision for brands is the exact same as games or play experiences, in that we imagine an ecosystem where there are thousands and thousands of these experiences. They are created in concert between brands and possibly creators and developer communities. Just as games and play experiences were new on Roblox 16 years ago, this is relatively new for some of them. So there is some touch now. In our Investor Day next week, we'll be sharing the parts of the roadmap we're working on this year to make that as self-service as possible. This includes the creation of the way they deal with IP and assets, and how they may if they choose to monetize. The high-level vision we have is just as print and video have been, and continue to be interesting ways for brands to interact with their audience, immersive – is really an immersive way for brands to connect with their audience. As you noted with Vans World, which had over 40 million visits, people who visited Vans World were able to wear Vans, go skateboarding, check out the shop, and see what new items Vans had for sale. This is a really immersive way for brands to connect with their fans.

Great. Thank you, Dave. Thanks, Mike.

And one from the webcast, Thomas Reiner from Altimeter. Can you discuss the monetization trends internationally versus Canada and U.S. year-to-date? You've invested a lot in localization and in back-end is monetization internationally growing faster than U.S. and Canada.

Thanks, Thomas. I have to go back and look at the rate of change of monetization. I'd say right now, we're in the part of growth internationally where it's very much driven by user growth. Over time, going back many years in our core markets, we've seen users retain on the platform. They spend a cumulative amount of time. Some percentage of them convert and become payers. Once they become payers, and are retained as payers, they tend to increase their spending levels. I think that's happening faster now in international markets for a variety of reasons, primarily because you've just got a smarter creator base with better content. So people are becoming payers faster and starting to increase their monetization faster. Right now, again, we generally are looking at bookings growth as driven primarily by user engagement growth. We get the question a lot about the ratios between monetization per user and I'll just caution that when you have high bookings growth and high user growth, just the rate of change in the numerator and denominator can make numbers look like they're going up or down. Generally, our trends of monetization over a very long period of time are that those payer cohorts tend to increase on monetization over a very long period of time. So we go back to core markets like U.S. and Canada. We still have growth in our payer cohort. It's going all the way back to 2016, and we expect that we're going to see the same behavior in international markets, particularly in Asia-Pacific. When I look at the high-growth markets in the quarter that we just completed, the really high-growth markets of Southeast Asia, East Asia, which is mostly Japan and Korea; Western Europe, as we've been talking about a lot; France and Germany, Spain, and others; and then Latin America. In some of those markets, you have a very wealthy user base and in other markets, you have slightly lower GDP per capita, so there will be a real mix. I don't know that we'll be forecasting exactly that ratio for a while, but we'll be looking at a lot of user engagement and the resulting bookings. That's really where we're going to be focused.

Your next audio question comes from the line of Brandon Ross with LightShed Partners. Please go ahead with your question.

Hi. Thanks for taking the questions. My first one, you highlighted the aging up and the number of experiences that are 13-plus. And I was curious if cultural events like Squid Game or 21 Pilots, are bringing even older users, and whether those stick around? And generally, how you thought about your aging up? Do you think it's going to be, or has it been so far just adjacent to your core demo? Or are you bringing in older users? And then I have a follow-up.

So, great question. First, I want to highlight that right now, we don't have any only 13 and up experiences. We have 28% of the top thousand experiences having a majority of 13 Plus, but those are still experiences that are open to all ages. We talked a lot about aging up. We're right in the middle of it, and we're right in the middle of very solid growth in our 17 through 24-year-old cohort. The exciting thing about these older cohorts on our platform is there's a lot of whitespace there. We've historically started with younger players. It's been an amazing advantage to us because we've had to focus on being a civil and safe place. Now we see growth in two areas. One is the existing Roblox player base is growing up with us, which is a retention opportunity to bring them with us. But as you correctly note, we also bring other people in. Squid Game, the concerts, both examples of events that we believe most likely reached some new audience. In the case of Squid Game, people were looking for a place to experience that brand side-by-side with the awesome show. They came to Roblox to see that. So, I do believe those things add to the retained people that come into our platform and stick with us and bring new older players to the platform.

Yes. So let me just quickly add. We know that Gucci Garden had an older demo for sure in the month of September. It attracted quite a bit of an older demo. Each of these individual pieces of content, I think, contributes to an overall trend of broadening the age demographic around the Company. It's a receptive market when you do something like Twenty-One Pilots or Gucci Garden. Their music is a good example; where an artist that has an older following is likely to attract some of those users on Roblox. We have been tracking aged up demos for years. Historically, 13 to 16 was our fastest-growing age demographic, typically adjacent to our core 9 to 12 market. Right now, 17 to 24 is the fastest-growing demographic on Roblox. So, it's not any individual event or piece of content. I think it's a combination of everything that's going on, and certain experiences find big audiences and contribute to this broadening in age demographics.

I just want to mention one other thing on Squid Game and the implicit impact observed on our platform in various countries around the world highlights the velocity at which our cloud tools, our development environment, and the creators on the platform are able to respond and create interesting and immersive content. We weren't talking about months; we were talking days for functioning experiences that could go hand in hand with the TV series.

I want to continue with Dave for a moment. You mentioned earlier that you might discuss this during Analyst Day. Is there a way to directly connect the brands and companies to help them fully leverage the increased user-generated content being created around their business on the platform?

I think more and more of this is right. This was more an organic situation; more and more, I believe we will see intentional situations. A couple of days ago, for example, one of the top experiences on Roblox, Jailbreak, announced an intentional partnership with NASCAR, which is an awesome brand experience. So, I do think over time, we will see both organic experiences as well as intentional experiences. Even though this one is organic, I don’t want to speak for Netflix, but I've seen quotes about their appreciation of how this media sensation has manifested itself on Roblox.

Another intentional category mentioned in the letter was with Netflix and Bakugan. So that's another example of something that was quite intentional to stream that to a seller on the platform.

Your next question comes from the line of Brian Nowak with Morgan Stanley. Please go ahead with your question.

Hi, everyone. It's Matt filling in for Brian. Thank you for taking my questions. Recently, there have been some reports about smaller companies creating advertising businesses that place ads within Roblox experiences. I'm curious about your perspective on these approaches for brands to engage with the platform and how they align with the overall branding and advertising potential in Roblox. Additionally, I'd like to discuss the connection between online interactions and offline purchases. It appears there is significant potential for users to engage with brands on Roblox and then purchase physical products. For instance, if a child interacts with Hot Wheels in a Roblox game, they might then buy actual Hot Wheels cars. Could you share your thoughts on linking that brand engagement to offline sales? Thank you.

Matt, this is Dave. I'll speak on the advertising first and I'll go more long view on this rather than the specific. The long view is we have focused primarily to date on the engagement and the satisfaction of our users more than monetization on the platform. We've built systems, including our virtual economy and engagement-based payout that have created a very rich and vibrant developer community with large businesses. Some of our developers are making tens of millions of dollars a year. Advertising is an enormous opportunity, and at the same time, our vision for advertising is immersive, it's native, it's around high-quality experiences, and over time, we'll be working on rolling out. But the standards around this, how this is supported globally, we do think there's an interesting and big future, as well as a very high-quality branded advertising type future. So, we are optimistic about that. Regarding your second question about brands, maybe Mike can take that one.

Yeah. We see the same exact opportunity you described and are in the very early stages of talking to brands about that. For now, they're promoting their brands directly with the user base. I think it's logical; eventually, you would have a user who is not only interacting with the brand in a virtual world or even buying virtual goods using maybe Vans again, for example. They may have Vans clothing on their avatars and ultimately want to own those shoes or their shorts or those T-shirts. So we see it as a big opportunity. It would take all of the returns of being on Roblox to a different level. And so yes, I think there's no doubt in the long run that this is where we'll end up.

Maybe the first sign of this was our partnership with Chipotle, where this wasn't a full-on buying Vans shoes on Roblox, but there was a physical and digital connection there. I just want to reiterate that our outage was in no way affiliated with the popularity of that event.

Great. Thank you.

Your next question comes from the line of Drew Crum with Stifel. Please go ahead with your question.

Okay. Thanks. Good morning, everyone. So given the recent developments in China, can you share any updated thoughts around the Company's strategy in this market? And then separately, understanding you're saving more explanation around the cost of the outage for later date. If you're willing, can you discuss how these influences or changes where you direct resources and investment spending going forward?

Yeah, first, I'll go to China. We take a super long view in the Company and we have a vision of a platform that connects around the world where content created anywhere is able to be experienced by people anywhere. We continue to build out this system to make that possible. We have a wonderful partnership in China with Tencent and remain diligent there. On the outage, what I will share is that what we saw in the outage is the value that we have regarding respecting our community. That highlighted how big Roblox is a part of people's lives, and how they use it and depend on it to be together. I think it's fair to say as part of our analysis, we will be sharing what we'll be doing to make sure this never happens again. There may be some adjustments, which I think are minor. I have complete confidence in our awesome team and we have an awesome infrastructure. There may be some adjustments that we will take as a result of that analysis.

Your next question will come from the line of Matthew Thornton with Truist Securities. Please go ahead with your question.

Good morning, David, Mike, and Anna. To start, regarding subscriptions, I'm curious about how they relate to engagement and retention. With some App Stores lowering their take rates on subscriptions, do your unit economics improve? Is there a chance to increase or accelerate subscriptions, potentially providing more revenue to developers? It seems like a mutually beneficial situation. I'll begin with that and then I have a follow-up question.

Just quickly answer. Subscription is creative to retention and for monetization? There's no doubt about that.

We have strong partnerships with Apple, Google, Microsoft, and other partners that help people access our platform and support monetization. Our goal is to allocate as much funding as possible to our creator community. As any changes occur on these platforms and their rates adjust, we intend to seize that opportunity to channel more of the virtual economy through our Company to benefit creators. In the long run, if App Store rates change, we plan to increase the funds directed to our creator community, providing them with greater economic advantages.

Great. And then maybe just a quick follow-up. I guess maybe a two-part housekeeping question. Can you remind us, Mike, you talked about November recovering post-outage and being off to a solid start? Could you kind of remind us normal seasonality, November, and December? And you guys did three small acquisitions in the quarter. I guess anything you can say, what contribution those have been to bookings. Thanks, guys.

Yes. Maybe the second question first. Very exciting and strategic transactions. We're pleased to have some great people on the team that came in with those transactions. Some entrepreneurs who had started really interesting businesses. It's great to have them at Roblox. They contributed $0 to the bookings of the Company. It was really IP, capabilities, and people, and we're delighted with all the transactions. In terms of November, as I said earlier, November and October are pretty similar. One fewer day in November, obviously. I'd have to look at the weekends if I was trying to forecast the number. We always do a little bit better on the weekends. And obviously around the Thanksgiving holiday, that's a big bump up for us in the month of November. You can look at the last year's data. October and November were pretty similar, and December was not quite double the October and November numbers, but pretty close, probably 80% higher or something like that. So you'd have a great big backend in Q4 with December, and that's just been true forever.

Your next question will come from the line of Clark Lampkin with Piecyk BTIG. Please go ahead with your question.

Hi, good morning. I have a tech-related question first. You guys talk about infrastructure expansion to reduce latency at RDC. I'm curious if you could help us think about how much might accelerate over the next few years and whether something like ITS could scale as you keep growing due to AI? And second, what sort of relationship or elasticity exists between user growth and latency reductions for gross add or retention standpoint. Separately, Dave, I think nearly everything on your list of five-year goals was checked off, with the exception of the president mentioning their avatar on camera and a portion on the toys sold item. You filled out in time on both of those, but I'm curious whether you started drawing up the next version of the list and whether you might share with us what item or items are sitting at the top now.

Hey, yes. Thank you. Great question. That list is presented every year at our Roblox Developer Conference. It started four years ago with a set of 10 predictions that have been surprisingly accurate, including over a million concurrency and a Roblox place more creators outside the world than in. There are a couple of goals, as you know, we might not hit, including the president mentioning their Roblox avatar live, but we still have about 11 months, so we'll see what we can do. Regarding infrastructure, a couple of things. We've architected Roblox to reduce latency even in avatar interactions between players in Germany and Japan. Underlying that technology is a hybrid distributed physics system where some of what you're seeing is happening locally on your machine, including your avatar motion. Some happens in the cloud, and then time slicing occurs with remote players. At its core, we've really worked to reduce latency. We have many data centers all around the world. We have one in Poland, building one in India, and one in Singapore. Whenever possible, we connect people together at their nearest data centers. These are high-performance, high-reliability data centers that we support and build at very low cost. As you correctly noted, our operational infrastructure allows us many opportunities we have not tapped yet to improve latency reduction. We have a robust CDN infrastructure, and we have a lot of bandwidth around the world. We can facilitate connections between users in Japan directly through our network rather than the IP network to provide faster, more reliable connections. Underneath Roblox, there's a robust cloud infrastructure, close to 10 terabits of external bandwidth, which speaks to the strength of our infrastructure. We have other initiatives planned to reduce latency further as well as enhancements to our cloud influence.

There are no further audio questions at this time.

All right. We're going to take some from our virtual listener. First the question is, as Roblox grows and becomes mainstream for older audiences, how would you prevent inappropriate content from younger players?

We're already doing this, and I see the metrics every week. They are already really good and they keep getting better. It's really the top priority on the platform. I feel we're in a good position, and that we're starting from a difficult place, which is creating a civil society for people of all ages. As we bring more older players onto the platform, we carefully add some amounts of freedom in certain situations while always respecting our core foundation of safety and civility. It remains a top priority. We already have a lot of older players on the platform. Over half our users are over 13, so this is something we're continuously working on.

You mentioned the concept of play to earn or play to own, which is popping up in blockchain-based games. Is it something you would consider adopting over time?

We're focused on social connection and engagement at Roblox. Our mission is to support people doing things together, whether it's playing, learning, working, or experiencing entertainment. Our focus is on supporting that naturally and virally; if people want to come to our platform just to be with their friends. Speaking of game mechanics, we currently do not allow any experiences on Roblox to pay back Robux to the players. So we don't have any plans to do that.

The next question from Thomas Sawyer from O Capital. Hi, David, could you share your vision on retaining developers and creators? How are you looking at the developer and creator compensation in the future? And how is the general developer and creator feedback on the current state of things regarding how much they earn from experiences and items?

Yes. When we think about the creator community, we've evolved over the last 10+ years from a thriving hobby community to the introduction of our virtual economy. Individuals are starting to make a living on the platform, with larger studios making tens of millions of dollars a year. Recently, we've seen significant VC funding of Roblox studios to help them grow and accelerate. That progression is an indication of the health of the community. We focus on growing user engagement and the quality of that experience to grow the platform. As our platform has grown year-by-year, whether it's developer number 1, 10, 100, or 1000, we think their participation in the economy will continuously increase, and we're hopeful that trend will continue going forward. Thus, the primary means of retention for developers is a thriving and growing ecosystem, larger opportunities for developers, existing developers achieving more economic success, and more opportunities for new developers. This long-term focus exists on the quality of our toolset, as search and discovery built into the platform allows the already 200 million-plus users to gain a new audience.

Yes. I'm just adding that we've been vocal about moving more and more of the economics to developers. As we find efficiencies around the Company and around the platform, we try to pass those savings out to the developer community. The synergy between the growth in the platform and the payouts to developers has been fantastic. A few years ago, in Q3 of 2019, the entire developer community earned $26 million. In Q3 of 2020, it was $85 million, and in Q3 of this year, it's $130 million. That's 5X growth in 2 years. We’re thrilled by that growth, and we will continue to work with the community to enhance that number. If you've followed us since we went public, we’ve consistently discussed pushing more of the economic factors back to the community and will continue to work toward that every quarter.

Francisco Olivera from Arevilo Capital is asking if there is any particular acquisition strategy you're targeting?

There is, and it's a strategy that focuses on our long view vision, which involves finding amazing teams and technologies that we can integrate into our Roblox platform. We believe there is significant growth available to our Company, focusing on current growth vectors we've shared regarding global expansion, reaching all ages, and discovering new interesting ways for people to interact on Roblox, whether that be through learning, working, or consuming entertainment. Everything we do focuses on enhancing our core platform.

I think we have time for a couple more questions. One is about the roadmap for educational experiences.

Yeah. We're going to share our educational roadmap at our Investor Day in a week, and Rebecca will guide us on that. We're excited because we'll be announcing some partnerships through our Roblox community fund, where Roblox is used not just to learn computer science, but also to learn STEM, alongside creative and constructive problem-solving ways of learning. You'll see some partnerships with notable educational institutions that we will not be discussing today. We're currently leveraging Bellus technology to find creative, problem-solving individuals to join our Company, and we're actively using it in production as we bring new incredible talents to Roblox.

And the last question comes from Dan Sang from Angle Capital. Can you provide any learnings from your spatial voice tests? What should our investors look for as we move towards voice communication over time?

Yes, the learning process began well over a year ago when we did a holiday party on Roblox during COVID. I was able to hang out with many people at the bar during the event, and it was a great connection that I missed so much. We can see it now in adopting spatial voice across the experiences on Roblox, as we cautiously roll that out to a broader customer base. We think this could understand a huge part of Roblox's future, allowing people to come together in a natural way, especially in groups, enabling them to work, play, and learn together. More updates will come at Investor Day.

That's all the time we have for today.

Yes, just once again, thank you all, to our shareholders and to our Roblox community. We appreciate your support and look forward to seeing you in a week for our Investor Day. Thank you.

Ladies and gentlemen, thank you for participating. You may now disconnect. Goodbye.