Roblox Corp Q1 FY2023 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 First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Stefanie Notaney, you may begin your conference.

Thank you, Brent. Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox's Q1 2023 results. With me today is Roblox Co-Founder and CEO, David Baszucki; and CFO, Michael 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 our expectations of our business, future financial results and business 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 10-Q. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release, as well as in our supplemental slides. For our webcast participants, please note the question icon at the bottom of your screen where you can submit your questions. With that, I'll turn it over to Dave.

Thank you. Hey, and good morning, everyone. We are going to start with a prelude. And I want to talk a bit about bookings acceleration and the generation of cash, which is really exciting for our business. We're going to talk about our future bookings growth rate relative to cost of sales, infrastructure, and compensation expense, which is also a wonderful story. And then, finally, we'll touch base on innovation and what we've done since the start of this year. Our revenue in Q1 grew 22%, to $655 million. Our bookings grew 23% to $773 million. And I want to just highlight, bookings is how we run the business. We run the business based on cash. Our bookings growth rate year-on-year over the last five quarters have gone from negative 3%, to negative 4%, to plus 10%, to plus 17%, to plus 23%. We believe this is being driven by eight quarters of innovation and excellent engineering that have expanded our platform. Our platform is growing in all directions. GAAP loss was $268 million, while cash from operations was positive $173 million. We generated over $100 million of free cash and operational cash in the quarter, and this just highlights the difference between cash and our GAAP loss, which is driven by deferred revenue and other factors. Finally, our cash has been steady over the last six quarters, and we have approximately $3 billion of cash with no external financing. On the user side, our DAUs are up 22%, with an all-time high of 66 million DAUs. Our hours are up 23% year-on-year, once again an all-time high of 14.5 billion hours of engagement in Q1. All regions are up, and I want to highlight that our 13-and-up segment is growing 31% year-on-year, which bodes very well for our future growth as that's an immensely large available market for us. On the developer community, money flowing to our developer community increased 24% year-on-year to a record $182 million in Q1. We have some exciting things happening in our business. Our bookings growth year-on-year is already exceeding our cost of sales growth year-on-year. And we believe, in Q3 of this year, our year-on-year bookings growth will exceed our infrastructure year-on-year growth. This is a testament to the efficiency of our infrastructure spending and how we have built out our redundant data center. I want to highlight that we spent almost $400 million of cash on infrastructure over the last year, and we're still showing positive cash flow in Q1. Finally, we believe, in Q1 of 2024, our year-on-year bookings growth will surpass our year-on-year compensation expense growth through just operational excellence. We have not suffered layoffs. We continue to highlight that we're being very thoughtful in hiring the best and growing our headcount efficiently. On the cash side, once again, I highlighted we're in an excellent cash position. And on the innovation side, we continue to innovate. Our vision is to bring together a billion people every day with optimism and civility, and we're very bullish about this vision. We continue to feel very positively about this opportunity. In the last eight quarters, we've driven a lot of innovation. I want to highlight on the innovation we've really executed on, since January 1 of this year. Our innovation falls within categories of cost control, revenue acceleration, AI-generative creation, international aging up, and our vision of social communication. We've got a 15-year history of innovation. And we believe innovation is once again contributing to our bookings acceleration. On the cost efficiency, we've been using AI and machine learning for quite some time to drive the efficiency of our safety organization, which is our primary focus. We've automated reviews of 3D objects, audio, and images. On the revenue side, I want to highlight that our advertising system is now in testing. We have over 200 developers that are participating. We're not going to share the number. We will make a small amount of advertising revenue in Q2 of this year. The NFL has shared with our advertising system that, 'Portals have helped the NFL reach and convert a high percentage of new users into their experience.' We're really excited about this. It is a new ad format that complements image and video that is very immersive and native to Roblox. We've launched two AI-generative accelerators to help our creators create better and faster. The first is a material generator that allows developers to create any type of 3D material purely by using a few words. If a creator on Roblox says, 'I would like a brick wall that's a little bit covered with moss,' that's enough to generate a 3D material. We're proud that we achieved this early this year. We are also launching code generation. Roblox has an extraordinary repository of Lua code. We're using this to train a code generator that won't just help people auto-complete, but really helps create and script on Roblox. On the international side, we continue to drive the vision that Roblox is a platform that will work worldwide. I want to highlight Japan, which is now growing at over 100% year-on-year on daily active users. It's been driven by some advances we've made on semantic search and the quality of our translation. We continue, behind the scenes, to enhance the quality, performance, and efficiency of our Core 3D engine. We've made significant strides on our vision of social communication as well. Since the start of the year, voice on Roblox is now being used by almost 10% of over-13 daily users in the U.S.A, to be precise, 9%. We've rolled out lip-sync as well on our journey to fully animate avatars on the platform, either using lip-sync or ultimately camera functionality. By day seven, based on all the work we've done on contacts and friend-finding, people are finding 10% more real-life friends on the platform in the first seven days than they were a year ago. I want to recap, and then we'll start answering questions. Our long-term mission is to have a billion users every day connected with optimism and civility. We're focusing on driving bookings growth through innovation. Behind that bookings growth, we have a significant focus on operational excellence and efficiency. We believe that by Q1 of next year, bookings on a year-on-year basis will be growing more rapidly than cost of sales, infrastructure expenses or headcount compensation expenses. And finally, we want to share as much cash as possible with the creator community to drive innovation. With that, we’ll open up for questions. Thank you.

Your first question is from the line of Andrew Crum with Stifel. Your line is open.

Okay, thanks. Good morning, guys. A lot of discussion around slowing investment spending, I'm assuming or I did not hear anything around Developer Exchange fees. So, Mike, I guess, is the 24% as a percentage of Q1 bookings a good quarterly run rate for the business over the next several quarters, or does that continue to move up? And Dave, as you think about this line, I'm curious if there's a competitive response to Epic's Unreal Editor for Fortnite in terms of the economics the company pays out to its developer community? Thanks.

Yes, I'll go, and then I'll let Mike talk about long-term exchange. Developers are flocking to Roblox right now. In March 2023, the number of developers who earned something on our platform grew 63% year-on-year to over four million. The money to our community increased 24% year-on-year in Q1 to $182 million. There's an enormous economic opportunity on Roblox, and we see that continuing to grow with many developers moving to our platform. I'll let Mike comment on the Developer Exchange rate.

Yes, on the rate, we're pleased that we have continued to increase the rate of growth in Developer Exchange over the last few years. We continue to look for efficiencies in our business, not only to drive our bottom line, but also to drive increasing economics to the developer community, and we'll continue to do that over time. We've been very steady in our approach to increasing that number. As we garner efficiencies in the rest of the company, it gives us the flexibility to balance increased investment in the community with a small increase in the bottom line for the company. So, we'll continue to take that approach.

Okay, thanks, guys.

Thanks.

Your next question is from the line of Omar Dessouky with Bank of America. Your line is open.

Hi. Thanks for taking my question, and good morning. I wanted to double-click a little bit on that Fortnite creative question that was just asked. Some in the investment community have seized on it as a source of competition, even though the platforms are very different. So, I wanted to ask you, given the early stages of development of the metaverse, how would the emergence of a second ecosystem over time actually be beneficial or symbiotic to Roblox and its developers? And I have a follow-up after that.

Hey, Omar, great question. And I want to share a bit about how we think of innovation at Roblox, and how we have for the last, really, 16 years. As you correctly note, it's still very early in the creation of the metaverse. We see it in a place where Roblox can have a billion daily active users. We think about innovation as inventing and creating things that have never been done before to help drive this vision of the metaverse. One of those is UGC creation, which we launched over 16 years ago, that we do believe is part of this vision. There are many more innovations that are coming from us, and we shared the vision around social communication, AI-driven acceleration, and our vision around an ad platform. We're just very bullish that it's going to take a lot more new inventions and the creation of many more long-port pull technologies to reach that billion daily actives. That's what we focus our engineering and product teams on.

Okay, all right. So, maybe a follow-up to that. I noticed that a studio that got its start on Roblox recently raised a $25 million Series A venture capital round. So, as the most successful studios in your ecosystem become larger and their IPs and services are capable of standing on their own, how does Roblox think about incentivizing them to keep monetizing on the platform rather than through some social channel or another creator platform?

I want to highlight that's not really a future-looking thing. That's something that exists right now, and those incentives today are already massive and continue to grow. Our top creators create experiences that generate tens of millions of dollars. As they start to raise money, the size of those creators is getting larger. What I shared earlier about continued bookings growth, continued economic activity, operational excellence, so Roblox runs as lean as possible, both on cost of sales, headcount expense, and on our infrastructure. What that means is an efficient utility that pushes as much money back to those creators as possible. So, we think those incentives are already present. It's all about operational excellence, and moving as much economic activity to that developer community as possible.

Great, thank you very much.

Your next question comes from the line of Matthew Thornton with Truist Securities. Your line is open.

Hey, good morning, Dave. And good morning, Mike. Maybe two quick ones if I could. I guess first, any color on trends that you're seeing in April into May, and maybe just how we should think about what a normal second quarter looks like for you guys seasonally because, obviously, we've had a couple of really weird years? So, any color there would be helpful. And then just secondly, I think, Mike, last quarter, you guys talked about high single-digit-type EBITDA margin for the year. Is that still the way we should be thinking about 2023 or has that evolved at all? Thanks again, guys.

Hey, Matthew, thanks for checking in. We did our last monthly metrics presentation in March. I think we're all excited and glad that we did it, and are glad that we're done doing it. There's two years of pretty good, healthy data out there that reflects seasonality, and COVID, and reopening from COVID. So, I think there's plenty of data out there. The benefits of Q2, of course, are April was really strong with the Easter holidays, and June is strong because school is out, and it's the start of the summer, and summer is always a big time for the platform, as it is for lots of companies. In terms of margins, we talked a ton about it today on the call. Again, it's really about efficiency; it's about coming to a point in the company's history where we have returned to substantial bookings growth as a result of making incredible investments in people and infrastructure. Now we are being able to allow that growth to creep up to a level where it exceeds our investments in people and infrastructure. So, we feel really excited to combine growth with operating leverage over the next few quarters and years. We are really satisfied with where we are. We feel like we can make a really nice combination of investments in growth and leverage.

Great. Thanks, Mike. I'll hop back in the queue.

Your next question is from the line of Matthew Cost with Morgan Stanley. Your line is open.

Good morning, everyone. Thanks for taking the questions. I have two here. Maybe the first one for Dave, just looking at the over 13 age group in the first quarter, I think it grew a little over 4 million DAUs, up from the fourth quarter, which looks like one of the biggest increases that you've seen. Is there anything that you would call out that those older users are engaging in? What is driving that uptick in over-13 DAUs? And then, I guess just for Mike, on the margin side, I think in the press release, there was a comment about seeing some improvement on gross margins as a result of prepaid cards, as we talked about in the past that there was a comment in there about credit card. Is there an element of direct-to-consumer payments that you are working on in the mobile aspect that might be driving some of that leverage? Thanks.

Yes. Hey, first off on our vision, we have been sharing it since before we went public, is the whole vision of our product platform and category for all ages around the world. We have been working on this for many years with the vision that younger and older people play on Roblox and will connect socially, go to concerts on Roblox, and a wide variety of types of things. We're really pleased with the older growth as we continue to improve the quality of our engine simulation. As we enhance the quality of search and discovery, we are seeing more developers and creators start creating experiences that are exciting for people all over the world. The 17 to 24 age group is growing rapidly. We are seeing experiences like frontlines, which have been funded by our creator fund and are driving much higher quality experiences that older players are flocking to. We think there is still enormous potential in the older player base as people start to use Roblox as a way to socially connect as well. So, we're really bullish on the long-term size of that cohort.

On the credit card thing, I just want to highlight what we are seeing there. Our bookings year-on-year growth rate has already passed our cost of sales year-on-year growth rate because there are so many ways for our community to spend money on Roblox. They use prepaid cards, they can use credit cards, and they partner with companies like Google and Apple. As that expands, we're seeing the leverage we get as bookings grow faster than their cost of sales.

Great. Thank you.

Your next question is from the line of Clark Lampen with BTIG. Your line is open.

Hi, thanks for taking the question. I wanted to come back to bookings acceleration. Curious if you guys could provide a general sense of how maybe that's going to be balanced between user growth relative to monetization initiatives now that we are seeing more products coming out of the development pipeline? And maybe bigger picture, as we are thinking about the sort of diverging bookings and OpEx trends, is it reasonable for us to expect 20% as a reasonable rate over the balance of this year and next year?

Hey, Clark, on bookings, we’ve multiple things that drive our bookings. We start with a user base, and we look at the frequency of the user base. How often do they come to Roblox? That gives us our daily active users. Then we look at how much time those users are spending with us. Hours per DAU, that number has continued to grow, and has been really healthy across most parts of the world and most age groups. Then we look at how much capital is being spent per hour of engagement on the platform. Again, over the last few quarters, we've seen really healthy growth in our monetization. So it’s a combination of more users spending more time with us and spending more money on the platform. If you look at the monthly unique payers in our supplemental material, you'll see that primarily the bookings growth is being driven by more payers, but there is a slight increase in the monetization per payer. If you look at the monetization by region, which we broke out for the first time, you'll see good year-over-year growth in all regions except in Europe where we have had high growth in Eastern Europe vis-à-vis Western Europe. On the other hand, if you look at the peaks of monetization in the U.S. and Canada, we are starting to see the maturation of payer cohorts that can run for very long periods and they tend to monetize more as time goes on. Right now, the top-line growth is driven by the fact that our users continue to grow. If you look at our DAU charts and our engagement charts, they have been up over the last four-plus years. But we are certainly seeing healthy signs of users spending, especially the users that have been with us for a while spending incrementally.

And maybe if I could follow-up really quickly just on the topic of gift cards and prepaid cards, is that something that we should expect to be driven more by international markets? Or is there higher propensity there? If adoption does pick up in the international markets, does that have a positive implication for margin in those territories too? Thanks a lot.

Thanks, Clark. It has positive implications for margins anywhere in the world. We continue to look for places where consumers don't have access to prepaid cards to ensure that they have access because it's a low-friction, very much in-demand source of currency in our user base. We are definitely growing internationally. There is probably a higher propensity for store value in foreign markets that we are excited to continue to find places where there is growth, but there will be growth throughout literally globally. Our team is highly focused on growing the prepaid card business and they are doing an excellent job. For example, with over 100% year-on-year growth we are seeing in Japan, Roblox gift cards are now available in 65,000 different convenience stores in Japan.

Your next question is from the line of Bernie McTernan with Needham. Your line is open.

Great. Thank you very much. I was just wondering, Dave, you mentioned frontline, so I was wondering what types of content you are seeing that are most popular for older age demographics? Is it always the highest fidelity games? And reason being how do you think generative AI tools could impact the amount and content that is really geared towards older age demographics?

Yes. Hi. I want to highlight that Roblox is a place where new types of experiences that people have never seen before have been created and become huge favorites with billions of players. Frontlines is a more traditional, high-resolution type experience. Many of the experiences on Roblox, including favorites like Adopt Me!, Jailbreak, and Brookhaven, have huge older audiences and have become international favorites. We are uniquely poised to accelerate our platform with AI-generative technology. You're seeing early signs of it now on material generation and code generation, but ultimately it means 3D experience generation, avatar generation, improved real-time language translation, and enhanced quality of search and discovery. With our sizable user base and 60 million to 70 million daily active users, we have an enormous opportunity to enhance the quality of our AI. Keep an eye on that. We're very proud with the early signs from our code generator and material generator, but we’re building a platform to use this throughout Roblox.

Understood. And just a follow-up for Mike on the commentary on infrastructure and compensation leverage, is this a change in prioritization for margins, or is it a higher booking outlook? Just trying to think about what is driving this better outlook now for some of this cost leverage?

Hey, Bernie. One thing to start with is these bookings growth rates over the last five quarters, so it's probably modest, to our attention that we are back over 20%. The investments we've been making over the last couple of years are geared towards keeping and growing a massive audience, getting through COVID, and the reopening. We thought like those investments were very high ROI have driven bookings growth. We are now at a much higher level of bookings growth. We have higher top-line growth. We have more room for operating leverage, and so we feel like now is the right time to align that growth with our investments in hiring and infrastructure. Those decisions don't happen overnight. We will start to see benefits from that as we discussed in the back-half of this year, early next year, and beyond.

Your next question is from the line of Andrew Uerkwitz with Jefferies. Your line is open.

Hey, thank you very much for taking my questions. We appreciate the DAU by region, and the metrics, it's going to make life a lot easier for us. On that data though, could you just give a little bit of color? It's interesting that Europe is not at a much higher rate than, say, APAC. Can you give us a little color on where you think those numbers could go? Can they approach U.S. and Canada? And could you break Europe down between Western and Eastern, examining what those trends look like?

Hey, Andrew. In terms of the monetization levels, let me just pull up some data. If you look at the U.S. data first, what you’ll see is, in Seattle during the fourth quarter of '22, their monetization was above any of the prior fourth quarters, even at the beginning or the middle of COVID. Again, that has to deal with the length of time payer cohorts has been with us. We are adding new users and new payers while also benefiting from these older cohorts that have been with us for a while. In Europe and APAC, those are newer markets for us. Our penetration in these markets is relatively low, and we are building a payer base that will compound over time. Europe and APAC markets are more aged up at the beginning than the U.S., which started with a younger user base. We have seen good growth in APAC. However, as I mentioned, Europe is a mix of high-profile growth in Eastern Europe compared to Western Europe. Ultimately, in certain markets in Europe and Asia-Pacific, yes, the monetization should generally trend close to what we see in the West. In places like the U.K. and ANZ, we've seen similar monetization to what we have in the U.S. and Canada. Other parts of Western Europe should track this trend as well. In Asia-Pacific, Southeast Asia differs significantly from Japan. Earlier, Japan was really picking up steam, but it still represents a relatively small amount of our APAC user base engagement and monetization. Over time, that trend will move closer to the U.S. and Canada. We will just have to watch it, but it will definitely increase over time. Lastly, I’ll mention that we've built a dominant user and engagement base in Latin America, which has served us incredibly well with fantastic growth.

Got it, appreciate the color. One final follow-up for David. On the advertising product, I know it's early, but what's been the reception from brands? Are they gravitating towards a certain type of ad? Are you finding brands that would typically engage with Roblox but now they can't because you have a short form opportunity here? Just curious about the early commentary and how your views have changed around advertising.

There are two types of advertising visions that we have on Roblox. One is traditional, where users might see an image from a brand on a virtual billboard anywhere in an experience. For example, if a partner is introducing a new movie, they may want people throughout Roblox to see some movie posters for a couple of days. The more disruptive notion is offering advertisers the ability to bring people into their experiences and explore them in 3D. We have shared some of our partnerships, such as with Nike, Vans World, Gucci Garden, and the Annabelle Experience. These are called Portal Ads, allowing a native, non-invasive way for users who are on Roblox to jump into those experiences. This is a new ad format and one that we are really excited about given how disruptive it is. We’re seeing great early signals, especially on portal ads.

Got it. Thank you, guys.

Your next question comes from the line of Tom Champion with Piper Sandler. Your line is open.

Hi, this is Jim on for Tom. Thanks for taking the question. I have one for David on picking fund. Can you talk about the progress here? How much funding has been used in inception to-date? I guess we're familiar with fund lines, but it’s sort of like to rate high enough that we should expect more game funds or something similar in the future? Thanks.

Yes, I will have Mike dig up the numbers while I chat if we can find them for you, these details are public. I want to highlight that the primary way Roblox has grown and always will grow is self-service. I want to emphasize that the majority of experiences on Roblox have gotten there with no intervention. We have utilized the game fund, and we also have an educational community fund to jumpstart certain areas. In the case of the game fund, we aimed to help developers take the risk of creating experiences that might be more attractive for older players. We are also doing similar work in education. The initiatives with FIRST Robotics and the Boston Museum of Science align similarly, and we are jumpstarting educational experiences. I won't quote where we may go, but you could imagine opportunities for experiences around mental health or collaborative 3D office activities. We are going to retrieve the numbers to share with you on the actual amounts.

Yes. So, Jim, the fund is earmarked at $25 million. We have not spent all of that capital. But to Dave's point, we are very happy with some of the performances and experiences in the game fund. We track it frequently and we review it on a weekly basis. The vast majority of these experiences on the platform are self-started, which highlights the economics of our platform.

Your next question is from the line of Jonathan Kees from Daiwa. Your line is open.

Great. Good morning, guys, and thanks for taking my questions. I wanted to follow up on Dave's commentary about the ads. Specifically about how those will be delivered in terms of a self-serve model. You've been conservative concerning its contribution to the top line, pushing more towards 2024. I’m curious about testing currently that is taking place and its potential contribution in Q2, albeit not material. Can you give us an update on the ad rollout, specifically self-service, and when that could be contributing materially?

Yes, I believe we expect this year to roll out self-service on what we essentially call a full ad server for both image and portal ads. This allows advertisers to publish these types of experiences to Roblox on their own. We are being conservative about expectations. We do expect to generate revenue, though I wouldn't necessarily call it significant in Q2. Mike, if you want to comment on that, please do.

Yes, there will be something in the second quarter, and we will talk more about it afterward, but I wouldn't be changing models for 2023 based on advertising today.

Got it, that's helpful. I wanted to inquire about layered clothing and the number of users, especially in this last quarter.

Yes, we will look into the numbers. I want to highlight that a larger trend is that this year, we are migrating to everything on our platform being created by our community. This includes clothing and avatar checks, as well as the migration to every avatar being animated and equipped with facial animation. Layered clothing is the first step towards a comprehensive user-generated avatar system, which we believe will enhance the diversity and breadth of avatars on the platform.

Yes. Jonathan, this is current numbers, living in May. But 267 million users have acquired at least a single item of layered clothing.

Great, that was helpful. It was a big jump too from last quarter as well. So, thanks a lot.

We have time for one more question from the line of Brandon Ross with LightShed Partners. Your line is open.

Hey, thanks for taking the question. I just wanted to end the call kind of where it started, with this cost discussion, and this is maybe an unpopular sentiment within the investment community, but it just sounds like you have so many opportunities, especially regarding things like generative AI. What are you leaving on the table by actually taking some margin and not investing more? Are there opportunities that you could be speeding up or uncovering, especially in light of the competition discussed earlier from Epic? Thank you.

Yes. I want to highlight that we continue to hire rapidly. We have a very mature product engineering platform right now, and we are going to continue hiring throughout this year, next year, and beyond. We believe our optimal hiring rate will intersect with bookings growth in Q1 of next year. So, we don't believe we are leaving anything on the table.

Hey, Brandon, it's Mike. Very interesting question, and we appreciate it. It's important to look at the business over the last three years. This covers the beginning of COVID up until now. We have more than tripled the number of people and our infrastructure spending has significantly increased. We spent over $700 million on enhancing our infrastructure. The key takeaway is that bookings growth has reaccelerated, allowing that growth rate to exceed our investments in hiring and in infrastructure. We're not making any drastic reductions in those investments. If you review the history of the company, it showcases sustainable growth that blends investments in core differentiators, organic growth, and a commitment to empowering creator communities. Our business model is long-term sustainable. Recent six quarters have demonstrated $3 billion of cash generation, along with careful investments in infrastructure. We feel like we are balancing these things effectively and hope to continue that trend moving forward.

Thank you for joining us today. And that's a wrap. Brett, you can close it out. Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.