Roblox Corp Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roblox First Quarter 2022 Earnings Conference Call. Today's conference is being recorded. And all lines have been placed on mute to prevent any background noise. Thank you. And at this time, I would like to turn the conference over to Stephanie Martone, Director of Financial Communications. Ms. Martone, you may begin your conference.

Thank you, Abby. Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox Q1 2022 results. With me today is Roblox's CEO, David Baszucki; and CFO, Mike Guthrie. Before we start, I want to remind everyone that yesterday, after market close, 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 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 forward-looking statements, including but not limited to, our expectations of our business, future financial results and 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 Form 10-K filed for the fiscal year ended December 31, 2021. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update 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 yesterday as well as in our supplemental slides, copies of which can be found on our Investor Relations website. Finally, this call is being webcast. And as a reminder, for those participants, you can enter your questions in the top right side of your screen. The webcast will be archived on our website shortly afterwards. With that, I'll turn the call over to Dave.

Welcome, everyone. We welcome all of our investors in the Roblox community. I'm going to share a few notes before we dive into the Q&A, especially for those who may not have deeply read our shareholder letter. Reiterating our growth, daily active users were at 54 million for Q1, which was up 28% year-over-year and our highest ever. Our hours of engagement were up 22%. Bookings were at $631 million for Q1, which was 3% below Q1 of 2021. I want to highlight that we generated over $150 million of net cash and $100 million of free cash in Q1. March was our most difficult month lapping COVID. What is really exciting is all the user gains we accrued during COVID; we've kept. That said, our bookings are highly correlated with hours of engagement, and our hours have decreased in some cohorts as we've emerged from COVID. I'll give an example, which is the USA 9 through 12 cohort, which is an extremely dynamic part of our numbers. Pre-COVID, we had 2 million DAUs in the 9 through 12 cohort spending less than 5 million hours per week. In the middle of COVID, that jumped to 3 million DAUs in that same 9 through 12 cohort spending 10 million hours per week. We emerged from COVID with that same 3 million DAUs, but now spending 8 million hours per week. This is highly correlated bookings and hours of engagement. It partially explains our year-on-year bookings number. For those of you that read our GAAP results, you'll notice that we're going to move to accruing revenue with an average user lifetime moving from 23 to 25 months. This will essentially increase the time we decrease or near out our revenue. But it could be interpreted as a sign of increased user retention, which is very positive for us. We have enormous headroom in the U.S. 9 through 12 cohort, because we have a lot of room on our frequency there. We do not share our MAU numbers right now, but there's a lot of room there. I also want to highlight that in our 17 through 24 cohorts in the core markets lapping COVID, we are still seeing solid DAU growth year-on-year. And in Q1 end quarter, we saw 6% year-on-year. Internationally, I want to highlight two countries. The first is India, which has enormous potential user activity. We saw in Q1 of 2022 India grow 160% relative to Q1 of 2021 at under 1 million DAUs with a lot of headroom there. And then Japan, which has potential for enormous economic activity. In Q1 of 2022, we saw growth of 3x relative to Q1 of 2021 with 183,000 DAUs. So that market is just in formation. We continue to drive innovation up and down our stack. A couple of innovations that I'll share with you that have emerged in Q1, include spatial voice, our layered clothing and fashion system, and our age verification system that works hand-in-hand with spatial voice. We've introduced Roblox Cloud and the ability for developers to access the whole back end of their experience through their own APIs, if they so choose. We have migrated to our own internal Roblox translate system, which has shown better long-term engagement growth than other translate providers we've used from the cloud. We've added a data center in India, which is part of the very rapid growth there, and has decreased latency by 50% in India. We're in the early steps of our facial animation data in Roblox Studio now. We continue to believe that continuous innovation is part of our long-term growth. In addition to these, we have many more innovations in the pipeline. We've shared in our shareholder letter the enormous opportunity for us to lean into the efficient frontier of the economy on Roblox. We are taking steps up and down our economy stack to optimize long-term retention and engagement with the revenue flowing through our system and the ability for our developers to build larger teams as they recognize more economic activity. A few projects underway at Roblox include both game experience discovery and marketplace discovery. We're well into projects there to balance long-term engagement with the monetization of various experiences. We're adding validated accounts to ensure users trust that the items they're buying are from real brands. We are about to release the ability for brands and developers to boost their experiences through discovery on our homepage, and we started work on our immersive advertising system, which supports brands by bringing traffic to their experiences. I want to highlight that anything we do with advertising will be consistent with our values, ages on our platform, and all laws and regulations around advertising, but there is enormous economic opportunity here. Just before we jump into the Q&A, I want to highlight our great brand experiences, including the NFL. We launched NFL Tycoon with McLaren and Alo Yoga, American Eagle, and Chipotle, all launching experiences on our platform. We hosted Grammy Week, The Brit Awards, David Guetta, and a 24kGoldn virtual concert with Sony. As your CEO, I want to emphasize the bullishness we have within the company based on the market's ultimate size. We have a healthy amount of cash while generating cash. We're unique in our developer community and the foundation of stability driving our growth. Thank you for joining us, and we'll move to Q&A.

And we will take our first question from Drew Crum with Stifel. Your line is open.

Okay. Thanks. Hey, guys. Good morning. So Dave, in your shareholder letter, you discussed innovations that are currently in beta testing, specifically custom materials and dynamic heads. Have they impacted your KPIs? And when do you expect these to go live? And then I have a follow-up.

Yes. In custom materials, we're actually live with parts of that right now. It's a more subtle feature in that it affects more diversity in the look and feel of experiences on Roblox. Right now, Roblox has done physically based rendering paradigms, so there will be different types of brick and brass, and we will be able to customize that. I think one long-term Roblox developer referred to this as doing God’s work with custom materials. Our developer community is really accepting of it. On facial animation, we're launching the beta in Roblox Studio, and developers have access to that right now. We're not sharing a date on the longer-term launch. As you can imagine, we want that to be as soon as possible to get it into every game so every avatar on Roblox is animated. Both of these innovations will have more subtle long-term effects rather than direct KPI effects.

Got it. Okay. Fair enough. And then, Mike, the April bookings were up high single digits month-to-month. Setting COVID aside, which creates some distortion in the numbers, can you remind us historically what the shape of 2Q bookings looks like and what you're anticipating as you progress through May and June this year? Thanks.

Yes. Hey Drew. I'll comment on what the shape of the curve normally looks like. April is typically a strong month for us. It was incredibly strong in '21. It was one of the last super high year-over-year growth rates as COVID started to wane and reopen. We had expected year-over-year growth to bottom in April. Right now, it looks like it bottomed in March, which is good. So sequentially, our year-over-year growth rates in April were better than they were in March. On a year-over-year basis, I expect that to be true in May and again in June. Normally, April is higher than May, and then June is higher than May as the summer season opens up. Last year, '21, we didn't see the normal seasonal curves because we were transitioning from heavy COVID early in the year to much more of a reopen period in May, June, and July through the summer. This year, we're open. We expect more normal seasonality to take hold, meaning we do expect the summer to be strong compared to where we are in the spring.

Thanks, guys.

Thanks.

And we will take our next question from Bernie McTernan with Needham & Company. Your line is open.

Great. Thanks for taking the questions. Maybe just to start, just high level, why is now the right time to be leaning into monetization and what gives you the confidence that consumers are willing to spend more on Roblox right now?

I'll answer this. I want to highlight what I said earlier about values being consistent and efficient frontier. I'll give you a highlight of the opportunity we have. I think this is more about an opportunity than consumers spending more money. Right now, for example, in search and discovery, we've historically made no real difference in how we feature experiences with the same engagement and long-term retention, even if one of those experiences monetizes 10 times what the other one does. This is more about consumer value in highlighting experiences that we've historically seen consumers want to spend Roblox in rather than trying to extract more money from consumers. The same is true for our catalog experience, which has room for optimization. We're moving our catalog to be 100% user-generated, which includes clothing, bodies, heads, and faces. We're enhancing trading efficiency and the dynamic nature of our catalog. We have a range of free and rare items. This is something Roblox has done well with for over 10 years. We have items that trade for $20,000 or 2 million Roblox as they become rare. We want to add this level of fun and dynamic nature to our catalog. Everything we do for our economy aligns with engagement first, and we believe this is an opportunity to realize the efficient frontier.

Understood. Moving onto advertising, knowing that it's still early days, is it possible to have a performance marketing piece in addition to brand marketing? If there is performance, would that call to action only be based on experiences within the Roblox metaverse or could it translate to the real world as well?

I don’t want to speculate on any dates or times. I want to highlight that everything we do is values consistent and within advertising guidelines, appropriate for various ages. One can imagine advertising units that appear as in-game billboards, in games that all developers can choose to use. This creates a dynamic ad server rather than 2D images or video. Brands could use these units to bring traffic to their brand experiences. We would never claim they would use this form of advertising. As fans are in brand experiences, activities include acquiring virtual items like in the physical world, drops, limited numbers of items our community would be interested in acquiring, items related to stars and celebrities our community would want to acquire virtually. Longer-term, we could tie a virtual item with a physical item, which could involve traditional shopping or NFTs. Thus, getting ownership of both the virtual and physical item. This reaches beyond performance into the whole lifecycle of fan-brand interactions.

Understood. Thanks for taking the question.

And we will take our next question from Eric Sheridan with Goldman Sachs. Your line is open.

Thanks for taking the question. I want to come back to what you raised in the shareholder letter around innovation in user safety. Can we get a better sense of how we should be thinking about spending on user safety in 2022 and how you view spending on user safety beyond 2022? A follow-up would be, you mentioned several examples of how user safety drives continued momentum on the platform. How should we think about user safety driving narratives and momentum around the broader platform for the longer-term and measuring it from a business performance perspective?

On user safety, we envision that as user growth continues and engagement increases, safety and stability is a competitive advantage that consumers will assume exists. It's a hidden function that we believe consumers will expect. We set high targets for our safety and stability metrics, believing that will enforce expanded growth on the platform. We're doing a substantial amount of work in machine learning, behavior recognition, detecting bad content and conversations. These efforts are foundational to our reputation and to the perception that Roblox is a safe and civil environment. We view these as accelerators of long-term growth rather than focusing on traditional metrics like hours per user.

In terms of modeling, I think modeling user safety spending in a consistent percentage of bookings is probably a decent assumption. This isn't an area where we're seeking tremendous operating leverage. We're focusing on high-quality safety solutions for our user base. As Dave mentioned, safety efforts improve the platform and could make monetization easier if users feel safe and secure. In the short term, I’d suggest keeping it relatively similar as a percentage of bookings as you’ve seen in the last few quarters. If we gain efficiency, it would be because the top line grows slightly faster. Overall, safety is a high priority area of focus.

A big part of our safety and stability team aims for greater efficiency as we automate tasks previously managed by human moderators. Without making any specific forward-looking predictions, we anticipate that our safety and stability systems may become more efficient over time. We do not anticipate any long-term increases in spending efficiency, as we've managed through these dynamics.

Great. Thanks for the color.

And we will take our next question from David Karnovsky with JPMorgan. Your line is open.

Hi. Thank you. David, in the shareholder letter, you noted some changes to product functionality to drive higher frequency and retention for that 9- to 12-year-old cohort of US users. Could you walk through what some of these updates are? Are you already seeing the impact of that in your Q1 US, Canada DAU figure, or is the increase there more from aging up?

This is tricky because we do not share MAU numbers. Historically, we have made gains in these frequency numbers over the last few years. More people are on our platform monthly than daily. As frequency fluctuates, it impacts various factors including our app launch times. We've made gains to enhance and optimize launch times, so if a user switches apps, they can return without losing context in their Roblox experience. Our focus will be improving the DAU to MAU ratio, correlated with retention, with our emphasis driving larger MAU ratios alongside frequency improvements. We're optimistic we have room to grow.

In the U.S., the highest penetration rate during COVID was seen at the 9 to 12 age demographic; it dropped post-COVID. Meanwhile, over '13 to '16 and '17 to '24, there was growth but at a lower penetration rate. As lockdowns end, users are still increasing, but their frequency declined as they return to school. For older age groups, we’ve recently caught them up to pre-COVID levels. In time, we believe frequency improvements and adding more users to the 9- to 12-year-old demographic will drive overall growth across US markets.

Got it. And then, Mike, maybe just one on margins. I wanted to see if you could provide some framework for the balance of the year and if we should assume some positive operating leverage as we transition into your heavier bookings quarter? Thanks.

Pre-COVID, we saw low double-digit EBITDA margins and high free cash flow margins. We generated over $1 billion in cash as a private company. With COVID, we experienced a step function in top line growth, leading to low 30s margins. We did not aim to maintain those margins, but continued hiring and investing in our developer community, trust, and safety. Today, we enter with $3 billion of cash, making us highly liquid. The question is whether to invest for the long-term or manage margins. We're not focused on maintaining high margins now—our current focus is on value add through investment. If bookings grow faster, that will benefit margins.

Thank you.

And we will take our next question from Brian Nowak with Morgan Stanley. Your line is open.

Great. Thanks for taking my questions. I have two. The first one is about the shape of the year into next year. In the fourth quarter, you mentioned that as you progress throughout the year, growth rates and bookings should converge, and the exit rate for the year is going to be over 23. Is that still your thinking on the shape of the year in 2023 and the puts and takes regarding booking growth and user commentary from last quarter? The second question pertains to developer fees increasing as a percentage of bookings. Could you explain how your approach to developer fees is changing philosophically and how it impacts your creature mix?

When we came into the year, we anticipated bookings growth to bottom in April. In previous years, we had high bookings in 2021. We expect more normal seasonality to return, which should help shrink any gaps between user growth and bookings growth, especially entering summer with a positive outlook. If user growth continues strong, we will close the gap but won't necessarily return to previous levels.

Got it. Thank you, both. Very helpful.

And we'll take our next question from Omar Dessouky with Bank of America. Your line is open.

Hi, thanks so much for taking my question. I have two of them, one on layered clothing and one on your development strategy and philosophy. In terms of layered clothing, since you released it in March and fully in April, has adoption been ahead or behind your expectations? You described layered clothing as a steppingstone technology; what milestones does it need to reach before you release UGC Avatar bodies and dynamic ads? Have your learnings impacted when you might release those two technologies versus what you were thinking last year? And I'll follow-up with my second question after.

We have good adoption of layered clothing; roughly 30% of our daily actives are wearing it now. I think the long-term impact of user-created bodies and heads could be bigger than layered clothing. This development is underway, and we’re working quickly on those timelines to maximize the impact of both.

To finish up, could you explain why your strategy of developing technologies like layered clothing to be compatible with previous generations of digital matter is difficult for competitors to replicate?

This is an excellent question. We believe Roblox's competitive edge comes from a holistic combination of factors. It includes momentum in our large creator community, quality of our development platform, safety and stability foundations, and our innovative path. We strive for continuous innovation. The self-service platform we've built is scalable, allowing small hobbyists to major brands to develop experiences. Thus, enhancing users' enjoyment and interaction with our platform.

Thank you, Dave.

You’re welcome.

And we'll take our next question from Brandon Ross with Lightshed Partners. Your line is open.

Hi. Thanks for taking the questions. I have a couple. You mentioned the high ROI on your investment spend. Is there any way to quantify the impact of features on engagements or monetization? Will we see a more tangible impact from innovations like voice and layered clothing as this year goes on? Then I have a follow-up.

Internally, we try to analyze contributors during our rapid growth phases. With recent innovations like spatial audio, we will measure engagement time, which will give us good signals about their impact. For innovations, we will share metrics on improvements in user engagement and retention when possible.

In the past, looking at performance over three to five years has shown this business model allows for continued user engagement and bookings growth. Our focus on quality engineering leads to great returns. We are committed to improving unit economics as we invest in the company, ensuring we see strong returns.

For layered clothing, over 200 million items have already been acquired by users. On voice, we're rolling it out conservatively, aiming for validated users. For users who have access, their daily activity averages about 20 minutes using spatial audio.

Great. I was comparing your approach with outside IP holders to Epic’s approach, which seems more hands-on. Why is your approach more efficient, and does working closely with key IP holders make sense for Roblox?

That’s a great question. Our focus on developing a self-service platform presents complexities. We aim for the platform to be open for small hobbyists and major brands alike. Over the last 15 years, we’ve seen that consumer demand for user-generated content provides enormous scalability. Although I won't comment on competitors, we believe in the importance of our direction and our growth as an open, self-service platform, enhancing brand interactions.

Thank you.

And we have time for one more question. And that question will be from Clark Lampen with BTIG. Your line is open.

Thanks a lot. I have two. The first is on engagement. Dave, regarding the US 9 to 12 cohort, do you expect user time spent on the platform to stabilize above pre-COVID rates? Will incremental time come from user base growth, or could there be upside to average user time spent?

We've identified a lot of room in our core cohort, USA 9 through 12. While we have high user penetration rates, we aim to increase frequency between daily active users and monthly active users. Users in that cohort are spending slightly less time since emerging from COVID but our focus remains on DAU to MAU ratios to improve overall engagement effectiveness.

Pre-COVID, we had a relative trend of hours per DAU grow higher during COVID. While we're seeing added engagement when reopening happened, we have surpassed our pre-COVID hours per DAU. Our interactions globally have the same patterns, showing continued engagement to build on over time.

That's helpful. Just on hiring, Mike, most of your employees are engineering talent. Is the competitive hiring backdrop affecting your talent acquisition process? Is the higher cost per head inflation the primary outcome?

Yes. It is a competitive market, and we’ve noticed some escalation in salary expectations. However, we are ahead of our internal plans for hiring and still seeing great progress towards recruiting our talented workforce. We remain a fantastic place for engineers and product professionals to build careers.

Thanks a lot.

Thanks.

Thank you for joining us today. And Abby, that's a wrap for us.

Thank you. And ladies and gentlemen, this concludes today's conference call. We thank you for your participation, and you may now disconnect.