Earnings Call Transcript - RBLX Q2 2024

Operator, Operator

Good morning. My name is Pam. Welcome everyone to Roblox Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute. After the speaker's opening remarks, there will be a Q&A session. Thank you. I'd like to turn the conference to Ms. Stefanie Notaney, the Head of Financial Communications. You may now begin your conference.

Stefanie Notaney, Head of Financial Communications

Thank you. Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox's Q2 2024 results. With me today is Roblox Co-Founder and CEO, David Baszucki, and our CFO, Mike Guthrie. Our shareholder letter, press release, SEC filings, supplemental slides, and a replay of today's call can be found on our investor relations website. Our commentary today may include forward-looking statements, which are subject to risk uncertainties and assumptions that could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions are included 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 these 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 can be found in our press release and supplemental slides. With that, I'll turn the call over to Dave.

David Baszucki, CEO

Hey, thank you. Hey, welcome everyone to our Roblox Q2 2024 earnings call. Overall, it was a solid quarter for Roblox. We'll validate this as we kick-off with the numbers. I'm going to touch base a bit on the dialogue we started with our earnings call three months ago, and then I'll give an update on why we're optimistic about our future growth prospects. Starting with the numbers for the quarter, all metrics are back on north of 20% year-on-year growth rates and strong margin improvements. Our revenue in Q2 was $893.5 million. That's a 31% year-on-year gain. And that beat our guidance, which was in the range of $855 million to $880 million. Our bookings were $955 million, that's year-on-year 22%, that beat our guidance range of $870 million to $900 million. We had a record number of DAUs at $79.5 million, that's year-on-year 21%. And our over 13 DAUs were particularly strong with 26% year-on-year growth. And our over 13 are now 58% of our total DAUs. Strong across all regions, US and Canada saw their fastest growth since Q1 2021. Japan, one of the largest gaming markets in the world. We have our DAUs growing there at 56% year-on-year. And India, DAUs are growing at 57% year-on-year. That's an enormous potential market for us. Our hours engaged hit a record 17.4 billion, year-on-year that's 24%. Similar to DAUs, that was our strongest growth in over 13 with 30% year-on-year growth in hours. And similar trends in the US, Japan, and India with Japan engagement hours growing 66% year-on-year and India growing 60%. Our consolidated net loss was $207 million. That compared to our guidance of $267 million to $265 million. We were roughly $60 million better than what we guided to. And in addition to the strong top line, we continue to show a lot of fixed cost discipline. Couple highlights there, net cash flow operations in Q2, $151 million, up 433% year-on-year. And our Q2 free cash flow was $112 million versus a year ago, where it was negative $95.5 million. We're continuing to see benefits from all of our investments. The quality of our platform continues to go up well, at the same time, we're keeping costs under control. Importantly, our infrastructure and trust and safety expenditures were 8% lower year-on-year. The efficiencies are coming to a lot of infrastructure efficiency initiatives. We are continuing to add AI efficiency to our safety and moderation platform. And we'll note on the personnel expenses, that was flat year-on-year, but we would note that we've consolidated a number of employees to work in our office in San Mateo rather than remote. And unfortunately, not all of them were able to make the move. That contributed to our flatness year-on-year. We do continue to hire, especially in areas that are key growth areas for us, including our AI platform, our safety group areas that are driving performance and quality on the platform, and our economy and ads team. Okay. Three months ago, we shared with you on the earnings call steps we were taking to offset unseasonable growth rates that we had seen in Q1. And we shared that we were seeing early signs of positive impacts that have continued as we can see by the numbers into Q2. We highlighted a focus on four key areas. One was LiveOps, including bringing back platform-wide events in March, which kicked-off with our hunt. Subsequent to that, we've done the classic and we're just going live now with our next event called the Games. We talked a bit about ecosystem health. I'm going to talk about that and improvements in search and discovery. We talked about economy improvements and we also talked about this raw performance and quality. We've really been executing on those four big initiatives, and in addition to everything else we do in the company. On the search and discovery side, we've taken a lot of steps to drive diversity and help our users discover awesome new content. In addition to our AI-driven algorithm, we have brought forward really intelligent curation of up and coming content and content with new releases that we call today's picks. We have also increased the ability for our creators to launch and boost their properties with the ability to buy sponsored tiles on our homepage. And we've seen an increase in variety of content bubbling to the top of our marketplace. We are continuing to optimize and refine our economy. One of the initiatives we shared with you was improving the pricing dynamics of our avatar accessory marketplace. That's really paid great dividends. Our developer community is also working with the launch of price optimization, which will help developers around the world. And on the performance and quality, up and down our stack in a bunch of metrics that affect everything from very low end Android devices, throughout devices on our platform, we've continued to make improvements in raw performance, stability, quality, join times, and frame rates, all things that contribute to our growth rate. Hey, looking ahead, when we went public, we shared four growth vectors that we believe will take us ultimately to 1 billion daily active users, including growing around the world, growing among users of all ages, expanding the use case of Roblox to include gaming, social communication, shopping, entertainment, and learning, and expanding the diversity and power of our economy. Those are all continuing to show growth. And I want to just take a quick look just within the gaming segment right now, we have a very, very small portion of that, and we have enormous headroom in that one segment. Our UGC approach brings with it an extremely long tail of content. We have well over 20 experiences now on the platform with north of 1 million DAUs. Our creators are pushing to any device in any language. We have our users bringing their expressive and personalized avatars from experience to experience with a vibrant social graph and immersive 3D communication built in. And we're putting all of this on top of an extremely high performance and increasingly efficient infrastructure platform that in addition to supporting 3D simulation is and will more and more support AI inference as well. A couple highlights just in the gaming segment. Dress to Impress has come out of nowhere. It's an exciting property on the platform. It has doubled in DAUs from Q1 to Q2 of this year. It's a social sensation on TikTok and it's really loved by users of all ages on our platform. Dusty Trip, a new release just released in March, is solidly into the millions of daily active users. And FIFA, on June 1st, FIFA launched a major update to FIFA World, including a new tycoon style game. And since the update, they've seen bringing their total visit count to over 22 million, and the 18 and up users have increased 20% in the last 90 days. In the advertising and shopping domain, just want to highlight the continued growth and progress we've seen there. We've launched our video ads product, we've enhanced our self-serve ad manager, we've introduced third-party integrations with IAS and PubMatic. We are now testing real world shopping in Roblox with partners at Walmart and e.l.f. Beauty. And in Q2, the total brand activations to date went north of 400, which is almost double the cumulative from a year ago. A couple of really fun new brand partners. You might have read about IKEA's coworker, a virtual IKEA store, where they hired real-life employees to work in the virtual IKEA store. Netflix launched their persistent IP hub, Next World. And we've seen also activations from Shrek, Despicable Me, and even Six Flags. New artists on the platform, Rolling Stones, Ice Spice, and we had a concert from Post Malone from the Louvre as part of the Olympics with our partner, Visa. We'll share a lot more of these updates in September at our Developer Conference. One other note, I'm in the room with Louvre and we're smiling at each other. I wanted to share that Mike, our Chief Financial Officer, has decided to move on from Roblox to pursue his personal interests and focus on his next chapter. And together, Mike and I are going to begin the succession process. Mike's going to stay on as our CFO through the search for a new leader and transition period, which we do anticipate will take some time. Just want to highlight, Mike joined the company in 2018 and over the past six years with Mike's leadership and contribution, we've had quite an impact throughout the company. Real part of our journey helped us go public, helped the investors, employees, and board members understand how the business works, helped us explain really how we run our business based on cash and bookings, and that's really contributed to driving our growth. And the team that Mike has built is absolutely amazing and contributes a lot to our growth. So hey, Mike, before I hand it over to you, just want to say on a personal note, it's going to be fun to still keep working together as we do this search and we're also thankful for you and glad that we have a little more time to work together. So thanks, Mike. And I'm going to hand it over to you.

Mike Guthrie, CFO

Thanks, Dave. I appreciate it. I want to emphasize that I've enjoyed the past six and a half years and look forward to finding a strong financial leader for the company and assisting in their transition. As the Head of Finance, I am pleased with the company's financial position. I am optimistic about our growth and return to cash flow. Our margins are expanding, and the balance sheet is in excellent shape. It has been a remarkable time and a privilege to be part of the company during such significant growth. I want to reiterate many of the points Dave made regarding the quarter and the business's condition and our future direction as it relates to our annual guidance. Bookings increased by 22%. During our Investor Day last November, we discussed maintaining over 20% growth. We fell slightly below that in the first quarter, but even with a challenging April, we achieved 22% growth for the quarter. The exit rates have been strong as we move into Q3. Operating leverage is a key highlight for this quarter. Beyond the top line, it’s essentially about leveraging our fixed costs. We've focused on reducing fixed costs, primarily in two areas: infrastructure and trust and safety. Our key performance indicator is cost to serve per thousand hours, which you can find in our supplemental materials on the Investor Relations website. We've significantly decreased that figure over the past year. Last year in Q2, our cost to serve for 1,000 hours was approximately $12.75; this quarter it is $9.61, a 25% reduction. Additionally, infrastructure and trust and safety expenses as a percentage of bookings have dropped from 17% to 13%, which represents substantial operating leverage. There's considerable technology involved in this effort, and we are committed to driving further efficiency in this space. Another area is headcount. As Dave mentioned, regarding the return to office plan, our recent metric for bookings per person was $1.3 million this time last year, compared to $1.6 million this year, reflecting a 20% increase. Meanwhile, our cost per person is well-managed. Consequently, personal costs as a percentage of bookings improved from 26% last year to 21% this quarter. This shows a very strong enhancement in operating margins, exceeding the 100 to 300 basis points we discussed at Investor Day. Looking at capital expenditures, they were about $334 million last year and are expected to be around $180 million this year. We also addressed free cash flow efficiency at Investor Day, showing a turnaround from negative $95 million last year to a positive $112 million this year. For the full year, we expect to generate over $0.5 billion in free cash flow, which is a fantastic improvement and we are excited about that. Now, I'll quickly review our guidance for Q3 and the full year, which you can find detailed in the letter on our website. For the third quarter of 2024, we expect revenue between $860 million and $885 million, indicating a year-over-year growth rate of 21% to 24%. Bookings are projected to be between $1 billion and $1.025 billion, reflecting a growth rate of 19% to 22%. Our consolidated net loss guidance is between negative $275 million and negative $255 million, which represents significant improvement from last year. We anticipate adjusted EBITDA to be between $22 million and $42 million, an increase from negative $26.4 million last year. This figure excludes adjustments for deferred revenue and deferred costs of revenue, which total $113 million. Therefore, it's important for analysts to consider those line items while building their models. For operating cash flow, we expect net cash from operating activities to be between $147 million and $162 million, which is a year-over-year rise of 37% at the midpoint, indicating that operating leverage is carrying into Q3 and the latter part of the year. We expect capital expenditures around $42 million for the quarter, leading to free cash flow guidance between $105 million and $120 million, representing an 89% year-over-year increase at the midpoint. Continuing with our full-year expectations for fiscal 2024, we're raising nearly all of our metrics. Revenue is now anticipated to be between $3.49 billion and $3.54 billion, denoting a yearly increase of 25% to 26%. Bookings are expected to range between $4.18 billion and $4.23 billion, showing a 19% to 20% year-over-year growth. Our consolidated net loss for the year is projected to be between $1.089 billion and $1.049 billion. The adjusted EBITDA range is $92 million to $132 million, with a deferred revenue increase of $711 million and a decrease of $163 million in deferred costs. This results in a net of $548 million that should be reflected in the adjusted EBITDA and will be critical for your models. Our operating cash flow guidance is $685 million to $715 million, equating to a 53% year-over-year growth at the midpoint, further illustrating strong operating leverage. Capital expenditures will remain around $180 million. Consequently, our free cash flow guidance for the year is now set between $505 million and $535 million, which indicates a 319% year-over-year increase and is approximately 35% above the guidance we provided last quarter. We are feeling very positive about our financial state, with a solid balance sheet, continued top-line growth, and the expectation of sustained operating leverage and free cash flow in Q3, which is also reflected in our full-year guidance. Thank you all very much, and we will now open the floor to questions.

Operator, Operator

Thank you. We'll go first to Drew Crum at Stifel. Please go ahead.

Drew Crum, Analyst

Okay, thanks. Hey, guys. Good morning. And, Mike, best of luck to you. It was a pleasure working with you through the years. You touched on this in the shareholder letter and kind of touched on it in your prepared remarks, but just wanted to see if you can expound on the point. If our math is correct, using the midpoint of the ranges, it looks like you've taken up bookings guidance for the second half by $85 million. Can you address the source or sources of the upgrade and just the confidence you have in achieving the updated range?

Mike Guthrie, CFO

Yes, we began implementing significant changes three months ago during our last call. We started to see improvements in late April and early March. We remained cautiously optimistic, which was reflected in our lower guidance at that time since we lacked sufficient data for projections. Since then, we have observed an acceleration of those trends, with notable enhancements in user growth, engagement, and consequently, bookings growth. Given the strong exit rate of bookings in the second quarter and what we've observed at the start of the third quarter, we are confident in increasing our full-year guidance. Additionally, we continue to see the expected operating leverage, which explains our adjustments across all metrics down to free cash flow. In summary, what has been working effectively for the past three months continues to do so and has even accelerated in its impact, leading us to believe that the overall health of the platform has never been better.

Drew Crum, Analyst

Got it. Okay, thanks, Mike. And then, separately on the regulatory front, the U.S. Senate passed two bills yesterday aimed at protecting children online. Just curious your thoughts on how this in any way impacts the Roblox platform. Would it require any step up in investment? Does it change your plans and strategy around advertising? Thanks.

David Baszucki, CEO

Yes, that’s a great question. I'll start by mentioning that Roblox was the first sponsor of the California Age Appropriate Design Code. We always support legislation that promotes privacy and safety for people worldwide. In the case of the California Age Appropriate Design Code, we were already implementing much of what it included and backing it. We continue to keep an eye on legislation and are very supportive of measures that enhance safety and privacy. This focus has been a core value of our company since our inception. Thank you for the question.

Operator, Operator

We'll move next to Bernie McTernan of Needham. Please go ahead.

Bernie McTernan, Analyst

Thank you for the question. To focus on the guidance, Mike, the strong exit rate from the second quarter and the solid start to the third quarter were surprising in light of the slowdown that's being projected for the third and fourth quarters. I'm curious if you'll provide more details on that. I noticed that the shareholder letter mentioned a conservative approach. Additionally, Dave, regarding the new genres mentioned in the shareholder letter like action, sports, and racing, could you explain what is involved in establishing a new category like this? What steps are taken to communicate with developers and what additional tools are necessary for them?

Mike Guthrie, CFO

Hey, Bernie. I don't think there's any significant deceleration modeled into the guidance to be perfectly candid with you. Yes, the exit rate is strong and we've seen that. We're going to continue to be careful and conservative with our guidance. We want to leave ourselves room. And I think that's really the best thing to say at this point. 90 days from now, we'll be back here. We'll talk about our results and see whether or not we did better than these numbers. But we feel great about the business and want to make sure that we continue to exceed what we talked about at Investor Day last November. And that's really what's baked into this.

David Baszucki, CEO

On the gaming side, as we've mentioned, the market is over $160 billion. With our bookings guidance for the year set at around $4.2 billion, we are currently at just 2.5% of that. Regarding game genres, many in our creator community are thriving with properties that have millions of daily active users across various genres including roleplay, battle, platformers, and horror experiences. We have shared with our creators that our platform, infrastructure, game engine, and tools are designed to support a variety of gaming genres. We conducted a research study to identify genres that are currently underutilized, aiming to raise awareness among our creators. We are noticing promising early signs in open world action, sports, racing, and social cooperation platforms. We believe there is significant potential in these genres that our creators are beginning to explore.

Bernie McTernan, Analyst

Great. Thank you both.

Operator, Operator

We'll go next to Cory Carpenter at JPMorgan. Please go ahead.

Cory Carpenter, Analyst

Great, thanks for the question. You touched on your commerce and ad initiatives briefly in your prepared remarks, but hoping you could expand on the progress you made on both this quarter and how that shapes your thinking around the longer-term opportunities? Thank you.

David Baszucki, CEO

Yes, I'll share a few additional details. We have been focusing on three main areas. The first is straightforward traffic-type ad units on our platform, which can currently be seen on our homepage labeled as sponsored. We've increased these units and noticed a rise in our creator community. For instance, FIFA utilized this to help launch and enhance their presence. This presents a significant opportunity for the creators on our platform. We also launched video for brands, and we are experiencing steady quarter-on-quarter growth in that area. Lastly, in the long term, we are supporting portals that drive traffic to experiences. With the integrations we've made, such as IAS and real-world shopping, we're increasingly enabling our brands to effectively measure the impact of these units. We are making significant progress, and I believe Mike would like to add something further.

Mike Guthrie, CFO

Yes, Cory, I also want to make a comment about the growth rate of the business and the forecasting of the business. One of the things that we think is really crystal clear that's come out of the last few months is that, we have the ability to build a great business with brands and ads and shopping and we have a great core business that we have built over the years is growing very rapidly. It's really clear to us that we can continue to grow the core business while investing in the new business and that will be incremental to our growth. But we're quite comfortable that we can continue to achieve our top line growth goals in our core business. As Dave mentioned, we have a very small percentage of the market. We've seen a fantastic reaction to product changes that we've made, improvements accelerated through last quarter and into this quarter. And so, it's really an and for us. It's the core business and the new business that we're building. And ultimately, we see that brand business as an accelerant to the growth rates that we provided in our plus 20% business on our core business.

Operator, Operator

We'll move next to Aaron Lee at Macquarie. Please go ahead.

Aaron Lee, Analyst

I wanted to ask about the LiveOps events. As you conduct more of these, have you gained any insights or lessons that could be applied to your upcoming events? Can you also share what you observed in terms of engagement during the recent event? That would be helpful. Thanks.

David Baszucki, CEO

I want to emphasize a distinct opportunity on Roblox. A key aspect of our LiveOps events is that we are a user-generated content platform. Some of our events feature 50 or more experiences, all participating and adding event features, whether it's the hunt, the classic, or the games, which focus more on sports and competition. These events do drive daily active users and retention. For instance, the classic event successfully brought back a significant portion of the Roblox community that has engaged with the platform over the years, thanks to its nostalgic elements. Additionally, they offer other advantages. Alongside our AI-driven discovery algorithms and curation, these events enhance visibility for a variety of properties on the platform, promoting content discovery and diversity. Overall, it's a considerable advantage. We are in a unique position to facilitate these events with impressive diversity. The games event is a prime illustration, featuring more than 20 sports-related experiences that align with our current two-week sports period.

Aaron Lee, Analyst

That's great. Thanks for the color. And then turning to the CFO succession. First, Mike, amazing job over the last six years. Best of luck and looking forward to seeing what you do next. Dave, as you start this succession process, are you looking internally or externally? And can you talk about what you're looking for in a candidate just given how much the company has grown over the years?

David Baszucki, CEO

We're just looking for another amazing CFO. Mike's been amazing and we're going to together find another amazing one.

Aaron Lee, Analyst

All right, understood. And well said. Congrats on the quarter.

David Baszucki, CEO

Thank you.

Mike Guthrie, CFO

Thank you.

Operator, Operator

We'll move next to Matthew Cost at Morgan Stanley. Please go ahead.

Matthew Cost, Analyst

Great. Hi, guys. Thanks for taking the questions. So there's some commentary, I think, in the shareholder letter about the North America user growth, which, as you pointed out, is the strongest, I think, during COVID. So I guess, really strong showing there. Is there anything you'd call out as a driver of that growth in North America and where do you feel you are on the penetration curve of the potential user base in the US and Canada? And then on the margin, I think that the full year guidance now implies over 300 basis points of market expansion this year. So a little bit ahead now of even that 100 basis point to 300 basis point guide you talked about at the Investor Day. I guess what is going better now than maybe you had initially expected and does it change your longer term view at all on the margin potential for business? Thank you.

David Baszucki, CEO

Yes, I think that highlighting North America growth, both DAU's hours and bookings, we believe is a validation of what we said three months ago and that with a heavy focus on performance quality, heavy focus on optimizing the health of our ecosystem with search and discovery, bringing LiveOps forward, tuning our economy, there's amazing headroom in really three ways. One is, as Roblox is used more and more spontaneously, there's headroom for Roblox more and more to become an everyday product. As Roblox gets more performant and supports a broader range of content, we're seeing even north of 25 year-olds, that user segment grow very, very rapidly. And then also as we continue to add wonderful kind of tune ups and improvements to our economy, while continuing to be freemium and having the majority of our people on our platform use Roblox for free, we're continuing to see benefits on that side. So there's a lot of headroom in North America. As I said, the gaming market is just one lens onto that where we arguably have 2.5% of the bookings of that. And in addition, in the future, to get to 1 billion daily actives, there's a lot of headroom in shopping, in entertainment, in education, and in social communication.

Mike Guthrie, CFO

Matt, regarding your question on margins, your calculations are accurate. It's primarily a combination of three factors, consistent with what we communicated last November. I believe we accurately described our expectations. The first factor is top-line growth, which helps us manage fixed costs, and it significantly enhances our margins. The second factor involves those fixed costs; we have observed substantial leverage in those areas, thanks to the excellent work of our infrastructure and safety teams who have focused on improving the costs associated with a thousand hours of service while enhancing quality, safety, and civility on our platform. The team's efforts have been remarkable. This situation serves as a prime example of how we utilize artificial intelligence and computational power to improve our cost structure, making it more efficient and safer, while also reducing expenses. The cost to serve has decreased by about 25% year-over-year, contributing approximately 400 basis points to our margin improvement. The second aspect relates to our workforce. A useful metric to track is revenue per employee, and we typically maintain a high revenue per employee at Roblox. Over the past year, that figure has risen to $1.6 million, reflecting a 20% increase from the previous year, which in turn drove about 500 basis points of margin improvement year-over-year. I expect these trends to persist, and your insight regarding the full year is correct, Matt. Our guidance suggests a margin improvement of over 300 basis points at the high end. Importantly, we've reaffirmed the favorable unit economics of this business. With our fixed costs now reduced, a strategic approach to manage them going forward is to leverage top-line growth while continuing investments that foster innovation but at a pace slightly below that growth rate to achieve incremental margin improvements. We've accomplished significant work in 2024, and looking ahead to 2025, I see the path becoming somewhat easier, as we can maintain our focus on innovation—what makes this company exceptional—while also realizing some incremental operating and free cash margins. The improvements in our margins since this time last year exemplify the true unit economics of our business, which is reflected in our guidance as you astutely noted.

David Baszucki, CEO

I just want to, of course, bring a bunch of things that Mike said in one focused example, and that is, as we've rolled out voice on our platform consistent with our foundation of safety and civility, we had to engineer a way to review and moderate all of that voice for safety. Our voice safety team built an AI model and a voice classifier that we're now able to run on our own infrastructure extremely efficiently and the quality and performance of this model is such that we open sourced a version of it to our community. It's not one of the most widely used, I think, trending audio models available on the open source community. So it's an example of full circle efficiency running on our own infrastructure, supporting improvements in the way our platform works.

Operator, Operator

Next would be Omar Dessouky at Bank of America. Please go ahead.

Unidentified Analyst, Analyst

Hey, morning, guys. It's Arthur on for Omar. Thanks for taking the question. I guess on certain discovery, I think last quarter, you guys mentioned that you saw some content staleness, particularly among the top experiences. And I know you guys have been making some improvements on the discovery algorithm to help drive content freshness. I'm just curious like how these top experiences have responded to these algorithm changes. Have you seen them sort of like publishing more frequent updates or was it just like the longer tail content that's getting surfaced more and more? And I have a quick follow-up and a guide if I could.

David Baszucki, CEO

I would describe the situation as a non-optimal ecosystem health regarding how we present content. I plan to discuss the algorithm further, but I want to emphasize that we have diversified the content featured in our today's picks, which represents intelligent curation. This is expanding across several groups as well. We've noticed that creators are benefiting from our sponsored tiles. Regarding the core algorithm, we are becoming increasingly transparent about how we evaluate and support various terms. As a result of these efforts, we've seen more properties rapidly gaining attention in the last three months. For instance, Dress to Impress has doubled in the past quarter. Internally, we assess the diversity of content and how it is distributed, and we have observed improvements in our internal indices over the last three months.

Unidentified Analyst, Analyst

Understood. That's super helpful. And then just quickly on the guidance, as I just look at the midpoint of the guidance, it looks like Q4, it would look like there's a four point implied decel versus what the Q3 booking guidance is. Is that purely just driven by last year from last year? Or is there some sort of organic decel assuming in there? Just trying to understand the puts and take a little bit more. Thank you.

Mike Guthrie, CFO

Hi, Arthur. It's A, the highest growth quarter of the year last year. So we are comparing against the highest growth of 2023. Additionally, as you correctly mentioned, it coincided with the PlayStation launch, which contributed to a healthy increase last year. Therefore, we'll have to account for that in Q4.

Unidentified Analyst, Analyst

Understood. Thank you. Appreciate it.

Operator, Operator

Next question comes from Clark Lampen at BTIG. Please go ahead.

Clark Lampen, Analyst

Good morning, thanks for the question. I wanted to come back to some of the commentary around AI-driven moderation initiatives. I'm curious, I guess, independent of that, what sort of runway for either growth or optimization maybe exists in other areas across the platform, whether that's OpEx-base or perhaps, I guess, separately with content creation? On that latter point, have you guys seen the sort of desired effects and impacts on platform growth and developer onboarding that you wanted with the introduction of some of that stuff within the tools? Thank you.

David Baszucki, CEO

Hey, great question. We're running over 150 ML and AI pipelines within the company's training, tuning, building our own models. Voices is a big one. We have a lot of AI running up and down the safety stack on content moderation, communication, safety. We have shared that we are building a foundational 3D model. And we recently, with our community, adjusted our terms of service so that our community could participate in a PII in a safety compliant way in using all of that 3D data to build a 3D generative model. We've seen really good early results with a lot of our tooling on texture generation, on coding assistance, but we do believe there's an enormous opportunity to build arguably one of the world's best 3D foundational creation models that will allow our creators to create by prompt, by other types of hints. So stay tuned on that. It's a big area of research and we're just getting started there. Safety is where we have most of our AI running now and we are continuing to grow on top of that.

Clark Lampen, Analyst

Helpful…

David Baszucki, CEO

I want to make one more comment. Safety exemplifies how we can run a significant amount of inference on our own hardware to maintain low costs. One of the advantages of having developed our own infrastructure with numerous edge data centers and extensive bandwidth globally is our ability to conduct this level of inference at a reduced cost.

Operator, Operator

That's helpful. Dave, if I could, I guess just if we look at guidance, I sort of have a bigger picture question around sort of the implications of this. If we were to take maybe a step back and look at just sort of objectively your guidance where it was six months ago even some of the investor day targets. I think it's sort of hard to argue that some of the changes that you've introduced more recently haven't put the platform seemingly on stronger footing than it was six or nine months ago. I'm curious if, I guess, if that's the right way of looking at it, how has this experience, I guess, over the last couple of months maybe influenced your views or perhaps risk appetite with regard to pushing through similar platform improvements, I guess in context of potential disruptions?

David Baszucki, CEO

Yeah, I would say we have a fairly thoughtful balance approach to risk. What you saw in the second half of last year was pushing a lot of long-range technology on our platform forward, facial animation, voice, more interactivity on our avatar. What we shared three months ago is concern that that may have introduced some drag on the platform. We also talked about content discovery, tuning our economy. I think it's validated that raw performance, quality, raw performance of our economy, raw performance of discovery, those just making those better and better in their own are huge growth drivers and we'll continue to focus on them in addition to all the visionary stuff we're building.

Clark Lampen, Analyst

Thank you.

Operator, Operator

We have time for one more question from Shweta Khajuria at Wolfe Research. Please go ahead.

Shweta Khajuria, Analyst

Thank you for taking my question. I have a very high-level advertising potential question for you. As you think about where you are today and your large opportunity in growing your ad revenue base. What do you think is the low hanging fruit right now as we think about the next one to three years and that you can capitalize on? And then how do you think about three to five years that you think you'd benefit from in terms of your revenue potential? Thanks a lot.

David Baszucki, CEO

My comment would be, in the window of one to three years, I'm not so sure we need to go after low hanging fruit as opposed to big strategic opportunities. And the way we run product at Roblox is, we go after systems, we go after large opportunities. What we more and more, with all of the brands on our platform, will continue to move towards in validating is closed loop repetitive systems where whether it's for driving brand awareness, whether it's for driving digital shopping, whether it's for driving physical shopping, we move more and more to, in addition to all the incredible brand engagements, a larger volume of just competitive, repeat day-on-day advertisers on top of the platform. And the stuff we're working on is strategic and we don't have to do low-hanging fruit. We have the opportunity to do the right big picture stuff.

Shweta Khajuria, Analyst

Okay. Thank you.

Stefanie Notaney, Head of Financial Communications

Well, thank you for joining us today, everyone. That's a wrap for us.

Operator, Operator

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