Roblox Corp Q4 FY2022 Earnings Call

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.

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.

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 of details, Q4 bookings were $899 million, up 17% year-over-year, or 21% on constant currency and highlighting this is around the world, including the U.S., Canada and APAC each at 19% growth in Q4, with some slight acceleration in 2022 going into 2023 with December at 20% year-on-year and January up 21% year-on-year. This highlights 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. In January, we saw our 17 to 24-year-old segment grow 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. Moreover, we burned almost no cash in 2022, roughly negative 0.5% cash, which we're really proud of. 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. 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. We continue to see what we believe are the benefits of this new category as we start to roll out 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 cues around human interaction, including eye tracking and arm tracking, which we don't always pick up on the phone or on a video call, and the ability to simulate more of the audio that we see in the real world that helps our communication. Finally, of course, what everyone does on Roblox, in addition to communicating, is doing things together. This vision 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 audio phone, video calls, texting, and messaging. Behind the scenes on our innovation stack, there are many metrics that are moving that to our average user are invisible, but are 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, and the overall performance around the world as we roll out new edge data centers. The more visible parts of our innovation continue to be present as well. We continue to roll out voice. We've had over a million experiences enabled for voice chat. As we continue to roll this out, we're very pleased with the adoption and the level of immersiveness it has brought. We talk about dynamic heads and facial animation because we're in the middle of this rollout. 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 a 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. We're well on our way and have 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. From a safety and stability standpoint, we're pleased to roll out experience guidelines in Q4, which complement 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 passing one billion visits at the end of 2022. Brands continue to come to Roblox as this is a new form of collaboration with our users. We're proud to welcome the NFL, FIFA, Netflix, and of course, Elton John and Mariah Carey. We have a lot more coming in 2023. Finally, given my background in educational software, we're really proud to see institutions like the Museum of Science in Boston roll out large immersive educational efforts, such as their Mission to Mars interactive experience. Safety and stability are foundational for us, and we were really pleased to 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 hope more states will adopt it. With that, I'll turn it over to Mike.

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, driven by top line growth. We spent over $400 million across the year, investing in infrastructure, primarily related to our data center in Ashburn, Virginia, and still managed to run the company effectively cash flow neutral for the year, which was an internal goal of ours. 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 that we had incredibly strong results, which can be seen in our supplemental materials around payers on the platform. In Q4, we reached an all-time high of 13.4 million payers, the highest amount of returning payers we've ever had, meaning people are sticking with us, which is great. We also 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. At the same time, the monetization per payer in Q4 was up significantly and as strong as ever. We're also seeing a very healthy conversion rate, with more users becoming payers than ever before, which is true across the globe. Each individual region is achieving its peak in payer conversion. They did at least over the holidays. When we look at that on a seasonal basis, it looks very strong. So again, as Dave mentioned, we had a great end to Q4, and a nice start to 2023. Why don't we pause here and open it up for questions.

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 timeline towards inexperienced creation tools? And what proprietary data sets do you have that could create breakthrough domain-specific applications using the GPT3 models?

Great question. This is a fantastic area. There will be a blog post from our CTO, Dan Sterman, coming out tomorrow sharing the wide range of opportunities that we believe ML will accelerate, including stuff we've been working on for quite a while. Within the Roblox virtual universe, we can certainly imagine code acceleration and the vast data set of Lua code that all of our creators have built on the platform that resides in our cloud. Of course, we can also envision 3D model acceleration, and something very significant to every player on Roblox is their own personal Avatar. Traditionally, Avatars have been created in many different ways, including mixing and matching parts and moving sliders. But we're expecting to see more and more innovation around Avatar creation that is much more natural and based on natural language. Moreover, there is a wide range of opportunities around customer service, NPC performance, performance of search and discovery, and the creation of 3D materials. There are numerous ways we will leverage ML here. We have a lot of data and feedback from our users. Please stand by and read more about this on Thursday.

That’s wonderful. Okay, we’re looking forward to that blog post. For a follow-up on a separate question, you have talked about the transition to a limited items economy on Roblox. I wanted to hear how your thoughts have evolved on that and what you see as the timing—whether that would be phased or if it's already in progress.

I will share the long-term vision with you. You will see pieces of this rollout throughout the year. In the real physical world, there's no constraint on who can create the items we use in our everyday life. New people can enter that market at any time. We have a wide range of pricing and activity in the real world. We're working as quickly as we can to reflect the range and expressiveness of the commerce we see in the real world and perhaps go beyond that. This is actively under development. We're moving towards a UGC economy where there are no limits, where everyone can participate, and where Roblox does not make everything—our community creates all of it, resulting in a vibrant economy that allows more and more creators to earn a living by creating items on Roblox with a diverse range of pricing. Expect to see more and more of these developments throughout this year, along with innovations that replicate how the real world economy functions in a virtual setting like Roblox.

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.

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

I'll give a general overview. When we refer to mature experiences on Roblox, as of now with our experience guidelines, we do not have any experiences rated 17 and above. The experiences on Roblox are nudging in that direction. More and more, we are seeing exciting content for older players. Interestingly, the core genre in Roblox has really emerged in the last three to four months—experiences like 'Doors' and others have become very popular. Many experiences on the platform, even for older players, cater to all age ranges as well. Just as in the early days of Roblox, we witnessed the market respond to opportunities from that player base. We’re seeing that with our game fund as well, leading to increased aged-up content on the platform.

So yes, David, regarding costs, let's back up a bit. If you look at our cost structure, there are really four primary areas of costs in the business. The first one is COGS and payment processing, which is more or less strictly variable, though it has been coming down as a percentage of bookings, primarily because we’ve been successful with prepaid cards and other alternative payment methods that are lower cost. The second area is our investment in the developer community, where we have been leaning more heavily, believing that returns are now being realized with better content, which historically has driven Roblox for years. In terms of fixed costs, we've made substantial investments in infrastructure and people over the last few years. This year, while we're slowing down the rate of hiring, we intend to continue hiring a sizable number of engineers because of our large ambitions and the work that remains to be done. Thus, we're making that investment but at a somewhat slower pace compared to previous years. Additionally, investments in infrastructure and trust and safety are high priorities for us, driven largely by user growth to ensure users have an exceptional experience. However, over time, we expect that to involve a high area of operational leverage. I’m not prepared to discuss a specific growth rate for expenses, but I do anticipate continued investment as we believe those are high ROI endeavors.

Thanks for taking the questions. The first question is on the January trends for bookings, which exhibited a 3-point acceleration ex-FX. I was just curious about how to interpret that. You also mentioned the Lunar New Year coming in January this year—does that typically contribute positively or negatively to bookings? Any color on what that trend looked like before the Lunar New Year would be helpful.

Well, December bookings would be a good reference point before the Lunar New Year since it fell into the period prior. The growth rate was high, making it a good benchmark. January also saw a slight acceleration over December as the business overall is accelerating. We've noticed more content and better content which is leading to growth globally. As Dave highlighted, we are seeing noteworthy growth in strategic regions. For instance, in our strategic region during January, bookings grew by about 37%. Regionally, in opportunistic markets like Latin America and Southeast Asia, growth was around 23% in January. We are experiencing compelling growth across various age demographics, particularly within the aged-up segments David referenced, 13 to 16, and significantly in the 17 to 24 year age group. We're also witnessing interesting growth within the 25 and over user base.

Help me understand the January trends and what's working, especially for the January bookings which had a 3-point acceleration. How should I parse that?

January bookings have historically been higher due to seasonality, and with the right content, I would expect that trend to continue. The strong performance in January reflects our overall operational strategy. As for the EBITDA margins, it was 20% in the fourth quarter; any update to your prior commentary that EBITDA margin should be below 10% in 2023, especially with the strong bookings growth in December and January? Or should we expect any upside to bookings to be reinvested back into the business? What we hope everyone understands from the fourth quarter is that over the course of the year, we were thoughtful about our investments. We see this business has a long way to grow. We chose to strategically invest last year in the hopes we would experience long-term growth. While there may be discussions of efficiency during various phases of growth, we decided to invest in top-line growth and anticipate that will yield the best leverage moving forward.

Reiterating what Mike has said, there is enormous long-term headroom in our business. Our target is to reach 1 billion DAUs on the platform. The largest segments in our business are those aging to 17 and older, which are growing significantly. We're focused on balancing growth, innovation, and operational efficiency. Our infrastructure is incredibly efficient; we've built our own cloud, which will yield ongoing efficiency benefits. We maintain a good degree of control over our headcount and growth velocity. At the same time, we aim to push as much funding as we can back into the developer ecosystem. Thus, we're taking a balanced approach to velocity of innovation while maintaining efficiency.

Thank you for taking the questions. I wanted to discuss Western Europe and APAC, seeking any additional insight regarding the reasons for the acceleration we're seeing now from either an engagement or content perspective, or any other drivers.

Some countries in APAC and Western Europe are not as mature as the U.S. in terms of user growth. However, I would highlight that the U.S., our traditional market, continues to show remarkable growth, especially in the 9 through 12 segments. Our focus on enhancing frequency and engagement, as well as ensuring a great user experience, has led to underlying worldwide growth, even in our core market. In Germany and France specifically, we had DAU and hourly growth both exceeding 20% in January. There's ample room to grow there. Ultimately, our vision of innovating how people connect aims to elevate engagement across every country globally. Therefore, some of these countries are simply at an earlier stage of the growth curve.

Just as you're analyzing the situation, I want to add two thoughts. First, as David pointed out, the improvements in language capabilities are benefiting translation efforts globally. Second, because we began with a younger age demographic in the U.S., this demographic has evolved while older age segments started to engage more. In Europe and Asia, Roblox's presence has built a more diverse and appealing content library to audiences across age ranges, resulting in substantial growth.

One last reminder regarding our AI efforts—our improvements to natural language translation continue to enhance the quality worldwide, as developers typically create content in one language which is then auto-translated for them into a variety of languages. An example would be Japan, where we've recently reached a product quality threshold that has accelerated growth—with our hours and DAUs in January growing over 100% year-on-year. This further accentuates the benefits of better translation technology.

Regarding R&D and trust and safety, can we gain some insight into how you might visualize the breakdown in those areas, particularly how those costs align concerning people versus infrastructure?

I can provide a very high-level overview. Our trust and safety measures, which are top priorities for us, present substantial automation opportunities over time. We believe that as we implement more ML and automation within our trust and safety protocols, we will reduce costs significantly relative to user growth. For R&D, we can scale our engineering team to receive productive results, developing products faster as we hire more engineers, so we tend to balance that independently.

Most current costs for trust and safety are primarily headcount-oriented. While we expect that to evolve over time, it currently constitutes more fixed costs in the short term, with potential for leverage in the long run. On infrastructure, which primarily involves costs related to running data centers, these are more fixed investments, absorbed over time as our user base expands, leading to potential leverage simultaneously as user monetization increases.

Hey. Thank you for taking the questions. Keeping along the cost theme here—continuing on David's earlier question and several others, you mentioned reinvestment in the community, and that you paid developers more than ever in Q4. However, if I look at it on a percentage of bookings basis, DevEx came down to about 20%, the lowest it's been in five quarters. Can you clarify why this is the case and what your thoughts are on the direction of payments to the developer community on a percentage of bookings basis? What can we expect forward?

It's not our intention for that number to decline as a percentage of bookings. Bookings rose sharply in Q4, which caused some temporary absorption of costs. Historically, you'll see a shift of a few hundred basis points over time. December was a unique quarter due to this surge in bookings, which created some unintended leverage. Our commitment stands to push more of the economics towards our developer community while discovering innovative ways for developers to monetize on the platform. I expect the percentage of DevEx to rise in Q1 and during the year, getting back to our previous range of 22-23%, and we'll strive for even higher percentages.

Thank you. I wanted to dive deeper into your brands and advertising, which was a highlight at RDC and your Investor Day. How have the ad tests been executed? Do you anticipate advertising becoming a meaningful contributor in the next couple of years? You mentioned brand experiences with artists like Elton John, whose fan base is distinctly older than your average user. Have those experiences successfully driven engagement among older demographics?

Yes, in fact, they contribute significantly, with millions of visitors engaging with Elton John's experience. However, that's merely one part of the growth—there's a continuous influx of high-quality content that is drawing in our older players. We're just in the infancy of our advertising strategy at this point. Our focus is directed toward establishing a self-service platform beyond the early experiments with brands. Observing the level of engagement on Roblox in comparison to traditional platforms, the advertising opportunity is immense. While we have a conservative forecast for the contribution from advertising this year, expect to see enhanced self-service advertisement capabilities rolling out.

We need to wrap up; this conversation will carry on over email. We appreciate the insight and questions. We'll take one last question.

Thanks guys. For two quick questions, Dave, can you clarify if there was any contribution from advertising in January? Could you comment on what's working or not working in your advertising efforts thus far?

Yes, we are working with a select number of brands in our early advertising experiments. Contributions from advertising at this stage should not be factored in as we focus on the self-serve model moving forward, at which point you'll begin to notice meaningful contributions.

Regarding seasonal patterns in future reports, I think we're basically through COVID comparisons, which is a relief. This time last year, we were coming out of Omicron. Beyond the emerging markets, we do not anticipate COVID variability in our numbers going forward, reflecting favorable performance entering the future. December and January performances suggest we are moving past that, setting the stage for a more stable outlook.

Yes, keep track of our year-on-year numbers, as they effectively neutralize seasonality, particularly since Q4 tends to be larger due to the holiday season. Evaluating our year-on-year numbers will account for any seasonality impacts. Thank you to our investors and the Roblox community for joining us on this call. I appreciate your continued support.

Thank you for joining us today. Brent, thank you for being a great operator, and that's a wrap for us.

Thank you, everyone.

Thank you, and that does conclude today's conference call. Thank you for your participation. You may now disconnect.