Roblox Corp Q2 FY2023 Earnings Call

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roblox Second 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.

Good morning, everyone, and thank you for joining our Q&A session to discuss Roblox Q2 2023 results. With me today is Roblox's Co-Founder and CEO, David Baszucki; and CFO, Mike Guthrie. As a reminder, our shareholder letter, press release, SEC filings, supplemental slides, and a replay of today's call can be found on our Investor Relations website at ir.roboxs.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 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, including in our SEC filings, including our most recent reports on Form 10-K and 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 as well as our supplemental slides. For our webcast participants, please note the question icon at the bottom right of your screen, where you can submit your questions. With that, I'll turn it over to Dave.

Thank you, and good morning, everyone. Q2 was another quarter of strong growth across all our key metrics, and we welcome you today. Bookings were $780 million, up 22% year-on-year. Our DAUs were $65.5 million, up 25% year-over-year. And our hours engaged in Q2 were $14 billion, up 24% year-over-year. We generated $28 million of operating cash; our cash is now north of $3 billion at $3.025 billion. We showed a GAAP loss of $283 million and covenant adjusted EBITDA at $37.9 million. These results are powered by all of our investments in innovation. And as we discussed last quarter, we continue to be on track with our bookings growth and our expense control to generate positive operating leverage. We highlighted in the first half of this year that our bookings are growing faster year-on-year than our cost of goods sold. We continue to expect in Q3 of this year that our bookings growth year-on-year will be faster than our infrastructure growth year-on-year. And we continue to expect in Q1 of 2024 that our bookings growth will be faster than our headcount expense. We expect to return to double-digit covenant adjusted EBITDA margins in Q4 and for 2024 as a whole. Let's dive into the business. We're driving continuously toward our vision and mission of 1 billion daily active users, and it's part of our four-part growth strategy. I want to highlight some results in all areas, including international, all ages, really the utility of Roblox, and driving toward a daily product for everyone and our economy and ecosystem. Let's start with international. And I want to highlight that many of our huge international cohorts are really big and growing faster than our overall bookings and DAU rate. Let's start with some key geographies. Germany DAUs show 25% year-on-year growth. Korea, 34% year-on-year growth. Brazil, 38% year-on-year growth, India DAUs 40% year-on-year growth, and Japan, one of the largest consumer gaming market spaces, has DAU growth of 107% year-on-year. A product highlight supporting this is we mentioned Semantic Search last quarter for Japan. We turned this on everywhere in Q2. This improved search for out of catalog searches and pop culture terms. And we've seen a significant increase in global click-through rate because of this, north of 3%. We're no longer talking about aging up; we are a platform for all ages. Our 13 and over cohort is 5 times larger than our under 13 cohort. And our 13-and-over cohort is growing at 33% year-on-year for DAUs. Our '17 through '24 cohort is growing at 36% year-on-year for both DAUs and hours. I also want to highlight that we introduced experience guidelines this quarter. You can read about it in our blog. Around the world, '17 through '24 and '25 and up cohorts consistently show higher bookings per hour than other age cohorts. Let's take a look at our developer ecosystem. We are on track for our developers to earn $800 million in 2023. Our DevEx payouts in Q2 were $165 million, up 16% year-on-year. And I want to highlight the growing variety of content on our platform. In the last 12 months trailing, the 10 highest earning creators earned an average of $27 million each. These are growing and larger significant businesses, but at the longer tail, developer number 1,000 is now growing 2 times faster over the last three years and is making $64,000 a year. That's thousands and thousands of people making a living on Roblox. As far as content variety versus a year ago, within the top 150 experiences, we're seeing 9% more variety of new experiences created in the last 90 days this year. A cool feature that we introduced for all developers is product analytics. It's a way for developers to monitor user acquisition, performance, and benchmarks. I want to highlight that in the last six months, use of analytics by the top 10,000 developers has gone from 22% to 40%. We think this is a good signal. This is 10,000 developers with 40% of them paying deep attention to analytics to help improve the quality of their experiences. For those that are deeply embedded into our ecosystem, I want to highlight that the anti-cheat technology we acquired from Byfron is now live. It's made a significant impact in the quality of experiences on our Windows platform, where a lot of our more serious gamers are playing, and has significantly reduced exploits and bot activity. As we're moving toward our vision and mission of connecting 1 billion people daily, we're making significant advancements in our products to make Roblox a daily utility. And I want to highlight that we believe we have significant headroom even in our core market, where we got our start, which is the USA 9 through 12. Highlight that we introduced Meta Quest on beta. We saw 1 million downloads in the first five days on that platform, and it highlights our vision of Roblox being available everywhere. When a creator makes an experience on Roblox, it immediately runs on all platforms and is dynamically translated into all languages. We believe that's part of the DAU growth we've seen around the world. Getting into utility, high-frequency communication on our platform. In the U.S., we now have 12% of our 13 and up daily active users using voice, and 2 million voice DAUs worldwide as of the end of Q2. This is a 30% growth over the last six months. We have strong evidence that as people become more immersed with voice, it leads to an uplift in key metrics, both on our spending and on Roblox. Facial animation, we just turned on for 100% of voice users. I want to highlight this, coupled with voice, makes Roblox communication much more connected and realistic. We also turned on animated heads for everyone using voice. We have some great features coming on animation as well. On the social side, I want to highlight that we've been hard at work improving the way people connect, especially with their real-life friends. We've seen a 9% year-on-year growth in real life friending in the first week, which we feel is significant and shows strong directional evidence that this benefits retention. Regarding our economy, we're creating products and systems to build a vibrant economy and empower our creator community to offer them more ways to earn and be discovered. Advertising is now live in its early form. I want to highlight some key things there. We have promoted Christina Wootton to Chief Partnership Officer to help drive our connection with brands. We've now executed over 200 brand activations on the platform and anticipate revenue this year from advertising. We will share our expectations for this at Investor Day in November. I also want to highlight that on the supply side, 19% of the top 100 experiences on our platform now have ad units. This has been added organically by the creator community, and I want to highlight that there are already areas where we see strong demand and more demand than supply for advertising on the platform. I want to welcome some of our advertisers that are live, including NARS Cosmetics, H&M, Spotify, NASCAR, and iHeartRadio. I'm really excited about the vision we've discussed that this is a new form of immersive advertising. This is a form of advertising that allows people to go to an immersive experience and truly engage with a brand. Highlighting that we are on track on our UGC economy to achieve full avatars throughout the ecosystem by the end of the year. We think this will significantly change the look and feel of Roblox, and we're really looking forward to that. Also, just highlighting search and discovery on the efficient frontier. In Q2, we've been able to increase both the impact of bookings and engagement on our search and discovery system at the same time, which is what we've been working toward. Let's talk a little about AI and just how significant it is for a platform like Roblox. We have approached 14 billion hours of engagement on Roblox in Q4. There are many areas where we're already live on the platform with machine learning and AI stacks, and more to come. I want to highlight that we have 70 machine learning training stacks right now. We have trained, for example, our own translation model with 1 billion parameters. This model helps auto-translate all experiences when a creator makes them. The range of verticals that we have live right now includes material generation and code generation, which have shipped. We've made impressive gains in both quality and cost throughout our safety systems on all types of assets as well. We've mentioned that we're building our own model internally and running our own inference on voice and safety for our search, which is live. We anticipate more 3D generative advancements as we progress toward creation everywhere and finalize our avatar project. I want to highlight two key things on our platform. First, we have nearly 5 billion hours of human interaction on our platform every month, which helps us reinforce the quality of our stability system. We believe that in the long term, because we can run infrastructure and inference on our own platform, we have the opportunity to operate at extremely low costs. For example, 100% of our personalized recommendations are currently running on our own infrastructure, managing inference and doing it efficiently at scale. All our safety pipelines—image, audio, voice, text, and 3D—are run on our own platform, which drives quality while maintaining cost efficiencies. Longer term, look for us to build larger and more sophisticated models, first around voice, text, and language supporting safety and stability, and ultimately look for models from us focused on general human simulation and user experiences, all running at high performance and low cost on our own infrastructure. Finally, to wrap things up before we start taking questions, we do have a research group producing high-quality technology that will be integrated into our product over the next two to four years under Dr. Morgan McGuire. You can check out research.roblox.com, where Manish Agrawal just published a great paper on adding conditional control to text damage diffusion models in 2023. With that, thank you, and we'll welcome questions.

Thank you. And your first question comes from the line of Andrew Crum from Stifel. Your line is open.

Okay. Thanks, guys. Good morning. So Dave, I think in your prepared remarks, you made a comment that the company is on pace to pay out $800 million in developer exchange fees this year. That would imply an acceleration in the second half over the first half against conceivably a deceleration in bookings growth. I just want to make sure those assumptions are correct and what's driving that uptick in the second half? Thanks.

Hey, Drew. It's Mike. Generally, back half revenue in our business is higher than the front half of the year. It's pretty straightforward. You know roughly what the payouts are, and that's what's driving the $800 million number.

Got it. Okay. And then just a quick follow-up. Can you address your plan to enable developers to offer subscriptions within their experiences? Any sense on timing and if or how Roblox would share in the economics of the bookings generated through subscriptions? Thanks.

Yeah. So, hi. Thanks for highlighting this Roblox way of thinking about things. A lot of our developers would like to offer VIP subscriptions directly for their experience. We are working on it. We plan to support this. We're not going to give a date or a time. We do think it will be significant, and we believe it will interact with subscriptions on the platform and recurring revenue.

And your next question comes from the line of Eric Handler from ROTH Capital Partners. Your line is open.

Yes. Good morning. Thanks for the question. Wonder if you could talk about what the impact has been on British cohorts concerning now having 17-plus rated content?

I want to share that it's early. That said, we have started to see some organic traction, which is just the same as we've seen in all areas. We have started to see developers build specific 17-plus experiences, and they're starting to show up in our sorts. We think this is going to continue to grow and get bigger, but you can check it out on the site.

Great. Thanks. And just as a follow-up, with advertising beginning to roll out now, how are you pricing the inventory?

Yeah. This is really exciting. We've been a little gentle on the pricing right now. We're going to expect at some point in the future to float the price. When we do this, we will see the true value of what we believe is an extremely new and valuable ad units, which is a teleport into an immersive experience. This is a new ad unit, unlike a video ad unit, and it allows real-time movement of people on Roblox into one of our partners’ experiences, and we will self-discover that in the free market as we float pricing.

And your next question comes from the line of Clark Lampen from BTIG. Your line is open.

Thanks. Good morning. I have two. Dave, I want to start with some of the AI commentary you made in the shareholder letter. Understanding that it's an accelerant creation across the platform, the consequences from a user side seem fairly obvious in terms of the overall experience improving. But as we think about the developer side, how does that increase in volume and velocity of content creation impact developers? Does it make it a more competitive ecosystem? If it is, is there a need to offset that with potentially higher developer distribution rates over time?

We think that we're entering an exciting new period on our platform. You highlighted that for users, traditionally, when users create immersive 3D content or social content, they're used to doing it with graphics tools and 3D type creation. We think experiences, for example, a fashion design experience, is going to migrate from using a virtual sewing machine and scissors to purely based text prompts. Ultimately, we'll enter an age on Roblox where anyone can make their avatar or clothing 100% through text prompts. If either of us wanted to build a piece of clothing, we could describe it, and it would get created in real time. We think for developers, this is going to accelerate quality up and down the stack. There's a great video clip—while we’re not going to claim when we will achieve this on Westworld—showing a text-based interaction of 3D creation. We believe this is the product vision where developers will have all tools at their disposal. We'll see a greater diversity of experiences. We will see individuals who previously didn’t expect to be creators making immersive 3D experiences. The experiences created by developers will become richer and more dynamic. Ultimately, we might even see experiences that are dynamically personalized for each individual player. It's really early, but we think it’s an exciting frontier for 3D creation.

That's helpful. I appreciate the comments. Maybe one for Mike as a follow-up. I want to kind of pull out the thread that you dangled a moment ago by saying the back half of the year is going to be bigger than the first half traditionally. I think that sort of implies an acceleration or at least steady growth into the back half of the year. Assuming that sort of persists, if not improves next year with product cycles that are unfolding, as we discussed advertising already, could you help us think about ongoing rates of margin improvement within the business? You identified the sources across OpEx, but maybe simplifying all of those things between COGS, ITS, and R&D over time. Does that roughly translate to around a 200 to 300 basis points per year? Is it a little bit more, or would you be willing to quantify it at this point? Thanks.

That was a long question, but a good question. We'll see leverage against pretty much all of the cost areas over the next 12 months. We think we’ll see a little leverage in cost of goods sold because we've slowed down hiring and leverage against our compensation expenses because we've slightly slowed down in infra, trust, and safety. We've already closed the gap pretty meaningfully on both of those two. To give you a few numbers: In the first quarter, infra, trust and safety was growing at about 33% year-over-year, while bookings were growing at 23%. In the previous quarter, infra, trust, and safety grew at 24% and bookings were at 22%. So you can already see there's a lot of leverage that we've demonstrated, and we are well on our way to seeing leverage in Q3 as well. The same goes for personnel; the headcount costs were growing far in excess of bookings in Q1, much less in Q2. We've already taken steps to ensure that we'll see leverage in Q1 of 2024. So we feel confident that all cost areas present an opportunity for leverage while we continue to invest in growing the top line. It will depend on a combination of how the costs roll out and how quickly our top line grows, but we’re not giving guidance on what the year is going to end up as. We're just saying Q4 is back into double-digits, and we should be able to maintain double digits for all of 2024.

And on the hiring side, I just want to highlight that we continue to hire a lot of people. The year-on-year incremental headcount compensation costs will decrease slightly. We do expect bookings in Q1 2024 to be growing at a year-on-year rate higher than our headcount compensation. And I want to stress again that we expect to see double-digit covenant adjusted EBITDA margins in Q4 and for all of 2024.

And your next question comes from the line of Brandon Ross from LightShed Partners. Your line is open.

Hey. Thanks for taking the questions. Your beta with Meta Quest actually opened a few questions in my mind. One of them is, while we're on new platforms, is there any update on opening Roblox to other new devices and game platforms like PlayStation or Switch? And then, I have a follow-up.

It's a great question. High level, we believe immersive 3D, human co-experience should be on every platform. We, of course, have our eyes on those platforms, and stay tuned.

Okay. And then, Dave, it seems like in the past, you haven't shown much interest in VR. I could be wrong. But do you believe that VR now will become an important tool for accessing your platform? And does the Apple Vision Pro change our perception at all of how people will experience 3D interactions in the future? Additionally, could you talk a little bit about how much more complicated it is to build for VR and AR and still create the same experience across all the platforms you work with?

Yeah. I tweeted a few weeks ago that we had 1 million installs on Meta Quest. There's a lot of good information in the comments where people who haven't used VR before are accustomed to certain Roblox experiences on their phone or computer. When they put on a VR headset, they're often surprised to find themselves deeply immersed in what they consider to be the same experience. So, we do believe it's a really immersive experience. Our strategy has always been that immersive 3D should be available everywhere. We want the highest quality experience on every platform and aim for creators to make once and run everywhere. We've done a lot of work on performance and human interaction so that the same experiences out of the box work on Meta Quest. Of course, much of the work we do for Meta Quest reflects throughout our entire ecosystem. The same optimization efforts we apply for Apple Vision also hold for PlayStation and Xbox. We’re really excited that the performance work we do for Meta Quest benefits our overall system. So we’re already very good at the build once, run everywhere philosophy, and there's tremendous opportunity for both immersion on VR and on more platforms.

And your next question comes from the line of Matthew Cost from Morgan Stanley. Your line is open.

Hi, everybody. Thanks for taking the question. I have two. Maybe I'll just revisit DevEx for a second. So step down to like 21% of bookings in Q2 is down a little bit from Q1. Given your expectation of $800 million of bookings—or excuse me, of DevEx for the full year, it would imply that as a percentage of bookings in the second half, that could have to step up depending on your bookings assumption, 2 points maybe even 3. So I guess I'm wondering, given that it's a formula that the DevEx payouts are based on, and you have gift cards offsetting some of what's happening in the second half, what changed in Q2, and then what's going to change in the second half to cause that ratio of DevEx payouts to go up? And then I have one follow-up. Thank you.

So hey, I want to go high level on this. We believe over time that there will be more ways for creators to earn money on our platform—traditional DevEx, engagement-based payouts, with advertising coming and potentially subscriptions and other things. This is going to be a very rich ecosystem. We've also highlighted that by Q1 of next year, we expect year-on-year bookings growth to exceed the growth of cost of goods and headcount expenses. This positioning gives us a wonderful balance between how much cash we generate versus how much we distribute to developers. So at a high level, the more we drive to this, the more opportunity we have for both earnings and DevEx. With that, I'll kick it over to Mike for detail on this.

Yeah. And then just on the quarterly and timing, look at 2022 as the year: DevEx rates were 23, 22, 22, 20 in the fourth quarter, 24% in the first quarter. The timing of prepaid cards indeed affects the payout ratios, bringing it back to 21% this quarter. If you can consistently look over time, you'll see that it's moving up and stabilizing in the 22%, 23% range, again, 24% in the first quarter. It won’t always be entirely formulaic, as we do have engagement-based payouts on top of the normal formulaic portion. As Dave noted, there can also be other methods for developers to participate over time. So these numbers will fluctuate by 100 to 200 basis points quarter-to-quarter at times. Overall, this implies that we expect to be a bigger business in the second half than we were in the first half, suggesting a good healthy payout ratio for our developers. Ultimately, we're always investing in the developers.

Great. Thank you. And then just on the AI model, there's a comment in the shareholder letter about creating a multi-model generative AI model. Dave, you were talking in the prepared remarks about how efficient you're able to be on the AI side. So I guess from a headcount and infrastructure perspective, are all the investments—if not in place—at least in the planning stage to create those AI models you’ll need to advance the platform to the next generation of capability? Or could we conceivably face a situation where as you try to build these tools, it may require more investment but could be a worthwhile endeavor.

Yes. I want to highlight that right now, we have a lot of people working on AI internally already. So we have a considerable team, especially considering the scale of what we're doing. We're running 70 different vertical training models right now. We've built a strong technology foundation on trust and safety. I don’t want to comment on the future opportunity, but right now, we're still on track for our bookings expense to exceed our headcount expense in Q1 of 2024. I want to emphasize that we have an excellent and sophisticated AI team already in place.

And your next question comes from the line of Omar Dessouky from Bank of America. Your line is open.

Hi. Thanks for taking the question. You launched UGC Limiteds in April. I was wondering if you could update us on your commercial learnings thus far, and I'm particularly curious if you've seen a corresponding increase in the mix of subscriptions. I have a follow-up question.

Yeah. I'll tell you, right now, that limited UGC is the long-term vision. Presently, it's a smaller proportion of our marketplace. However, one could argue that UGC Limit is more accurately aligned with the economics of the real world in terms of scarcity, cost of goods sold, and creating a rich and vibrant economy. Ultimately, we expect for every cohort and type of asset to follow this pattern of mirroring real-life economics. The pricing on UGC items is 3 times that of non-UGC Limited pricing, which is an excellent sign. It indicates we are moving in the right direction of adding strong economic theory to build a virtual goods marketplace, and we'll be rolling out expansions of this over the next two quarters—it’s our long-term direction.

Any comment on the effect on premium subscriptions? From my understanding, you need to have a premium subscription to participate in the trading.

Yeah. I believe we may be referencing the need for validation of user accounts for creators, which we may be using more as an identity verification method. We'll have to check on that. But I want to clarify that we are not aiming to use UGC Limiteds to increase subscriptions.

Understood.

We're not trying to drive subscriptions with UGC Limited.

Got it. How much do you think UGC Limiteds could influence the trajectory of monetization in your core markets in the next few quarters?

It's difficult to say. We're conducting experiments through various cohorts, aiming to optimize the mirroring of real life. All projections we discuss related to bookings versus expenses in Q1 revolve around the headcount growth or lack of acceleration and truly aim for bookings to exceed headcount expenses. I don't believe we have significant gains from this built in, but we see considerable upside.

And your next question comes from the line of David Karnovsky from JPMorgan. Your line is open.

Hi. Thanks. Dave, I was wondering if you could discuss— and I know it's early—how advertising units have impacted the overall experience. Is it purely additive to monetization? How does it affect engagement? Your shareholder letter referenced providing measurement and attribution tools to brands; I wanted to see if you could unpack that a bit. How much targeting do you think you can offer for marketing purposes?

Yeah. To unpack both points, developers have a lot of analytics right now on our platform, and they're opting into these ad units. We are optimistic that these types of ad units are native, immersive, non-blocking, and additive. We're not talking about things that prevent you from playing or pre-roll advertisements. We're talking about ad units that simulate the real world, allowing users to see a portal to one of our brand experiences and providing a back button to return right back. We feel really optimistic about this approach.

Thank you.

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

Hey. Good morning, David and Mike. Two questions if I could, one on AI, and one on ads. On AI, I believe you currently have thousands of trust and safety staff on the platform. That's an area where you could certainly apply AI to drive efficiencies. I’m curious if you have any insights or thoughts on the timeline for that and what the margin impact might look like. And then, regarding ads, as we look to the second half here, expecting a lot more information at Investor Day in November, that’s great. But how should we interpret just the biggest friction point that you see still needing to be addressed to accelerate that, or put differently, can you share any milestones we should watch in that advertising business? Additionally, I’d like to know what types of ads developers are opting for—portal versus billboard—if that's available.

Okay. Yeah. So here's a hint: we've indicated that our year-on-year bookings growth is set to exceed our infrastructure cost in Q3 of this year. Infrastructure includes everything related to our hardware, including trust and safety. We'll also note that all our asset review pipelines are advancing in quality and cost with AI acceleration. Regarding advertising, the significant point that I want to highlight is the number of brands engaging on the platform. We’re currently collaborating with over 200 brands, which is double what it was last year. The growth rate and adoption are essential for making the platform a rich and open opportunity for advertisers. Overall, I’m tracking this number more than anything else.

Yeah. And just to clarify on advertising types, 12% of the top 100 placements are portal ads.

And we have time for one more question. Your final question comes from the line of Tom Champion from Piper Sandler. Your line is open.

Hi. This is Jim on for Tom. Thanks for taking the question. I guess one for Dave. You mentioned some detail around decreases to the premium payout program. Can you just touch on that a little bit?

I don't think we've mentioned any detail around that. Can you provide more color on that?

We’ve addressed premium payouts on the call. You can refer to those comments.

Yes. So we've been talking about DevEx and engagement-based payouts, but we haven't announced any changes in either of those programs.

Okay. Great. And then I guess just one more on the developer exchange fee. Should we keep anything in mind with respect to FX here for payouts that are going to non-U.S. dollar developers?

Yeah. I'll add that we normalize everything to the U.S. dollar in all our payouts and do this in real-time as we settle payments.

Okay. Great. Thank you.

Well, thank you for joining us today. That’s a wrap for us. Rob, you can close it out.

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