Earnings Call Transcript - RBLX Q3 2023

Operator, Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Roblox Third 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. I will now turn the conference over to Stefanie Notaney, Senior Director, Financial Communications.

Stefanie Notaney, Senior Director, Financial Communications

Thank you, Christa. Good morning, everyone. Thank you for joining our Q&A session to discuss Roblox's Q3 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.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, expectations of our business, future financial results, and strategy. Forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in our forward-looking statements, a description of which is 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 it over to Dave.

David Baszucki, CEO

Thank you, and welcome everyone to our Roblox Q3 2023 earnings call. A couple of quick highlights. We're going to continue to talk about our delivering growth strategy, highlighting our vision of reimagining how we come together and continued moving forward on our mission to connect 1 billion people with optimism and stability. We'll highlight some of the product velocity and new monetization opportunities we’ve been working on. We're also going to give an update on our commitment to deliver operating leverage, which we shared in our letter. Finally, highlighting the breadth of our business which is connecting people around the world, connecting people of all ages and all backgrounds, and highlighting the complexity of the business that spans so many cohorts. Today, for the first time, we are going to give you a little hint at guidance looking forward, and Mike will do that after my discussion. Diving into Q3, a real strong quarter all-around. GAAP revenue Q3, $713 million, up 38% over Q3 2022. And diving more into how we run the business, which is on bookings and cash bookings of $839.5 million, up 20% year-on-year. Cash flow from operations was $112 million and $59 million of free cash flow. Our DAUs hit 70 million, which is up 20% year-on-year. Total hours of engagement were 16 billion in Q3, which is up 20% year-on-year. And from a liquidity standpoint, over $2 billion of net liquidity and $3.1 billion of total cash equivalents and investments. Finally, on a covenant adjusted EBITDA basis, we hit $81 million. So let's talk a bit about our growth initiatives. This goes all the way back to our S1 filing, which is connecting everyone around the world, a platform for everyone of all ages, Roblox everywhere, and a vibrant economy. On connecting the world, I just want to highlight, not just the growth in many really big future areas around the world, but also the monetization acceleration in these areas. Japan DAUs are up 66%, hours up 64%, bookings up 174%. Germany DAUs are up 27%, hours up 30%, bookings up 75%. Brazil DAUs are up 23%, hours up 23%, bookings up 62%. And India, a huge opportunity for Roblox DAUs are up 53%, hours up 49%, bookings up 76%. We continue to also show great progress in our vision that Roblox is a platform for everyone, regardless of age. On the DAU side in our 13 through 16 cohort, we saw 22% growth, 17 through 24, 27% growth, and 25 and up 25% growth on the DAU side. Hours, very similar growth: 13 through 16, 23%; 17 through 24, 29%; and 25 and up, hours of engagement, up 28% year-on-year. On our vision that Roblox is everywhere, and this goes to the vision that immersive 3D multi-player cloud simulation that connects and helps people communicate should run on every device. We brought forward two new devices recently. First, Meta Quest, which as of October 31st had over 2 million lifetime installs. Secondly, Sony PlayStation, which we announced at our Developer Conference and launched on October 10th, has had over 15 million downloads in October. Our goal is really for Roblox to be everywhere. On the size of a vibrant economy, we're innovating in many ways, continuing to grow our monthly unique payers. We had 14.7 million average monthly unique payers in the quarter, which is a record. We have some really exciting innovative extensions to the platform. One is really in the vision of Roblox giving our developers and creators the tools to run their own business. We're going to be introducing subscriptions for developers, so their experiences can host subscriptions, which we plan to launch this month. Advertising, we're going to share a lot more at Investor Day. We are making amazing progress here. We've hired Stephanie Latham as our VP of Global Partnerships to help supercharge this business. We've also, in addition to portal and image ads, started testing video ads in Q4 and looking to launch that in 2024; we'll share more of this at Investor Day. On the overall product velocity and the background, we shared a lot of our 2024 vision at our Developer Conference in September. Those videos are all available online for anyone who is interested. With a really strong pipeline of great innovation, on some of the big things we've been working around, which include voice and avatar simulation to more and more host real-time communication. Our voice DAUs for the quarter are now up 240% year-on-year. On the avatar side, we are now live with what we call UGC avatars, which is user-generated content for avatars, allowing the community to participate in the creation of avatars. We are now live with facial animation, and over time, we expect all avatars on the platform to support real-time camera tracking and facial animation. At our Developer Conference, we introduced a new platform called Roblox Connect, which is a showcase of communication technology that will be open-sourced and shows us a set of APIs that allow creators to embed communication capabilities into their own experience, including on mobile, and enabling phone calls to join with friends. A couple of highlights, we'll touch more on Investor Day. On the AI side, we continue to incorporate AI more and more across our stack. In addition to, of course, added capabilities like Roblox Assistant, which we rolled out in October, that you'll hear more about on Investor Day, and Roblox's other ways of generating things. I think behind the scenes, I just want to highlight the efficiency that this is bringing us, both on safety and moderation. We are moving many of our moderation pipelines more and more to AI, and this is simultaneously increasing quality as well as cost efficiency, and you can see that in our increased operating leverage. Finally, just want to highlight that at Investor Day in a week, we'll be covering a lot more of this. And now, I'm going to pass it over to Mike for some more discussion on our operating leverage.

Michael Guthrie, CFO

Good morning, everybody, and thanks for joining. I think Dave did a great job of covering the highlights. I just want to point out that it was another quarter of very solid growth, and that growth was accompanied by a management of the growth and expense in our business. In particular, our fixed costs, which we've been talking about for the last few quarters, which are personnel costs and infrastructure costs. Both of those grew at a substantially lower rate this past quarter. Infra and trust and safety grew at a lower rate than our bookings growth, which is something we had talked about and indicated would happen this quarter. So we're quite happy with that. That provides quite a bit of operating leverage, and we see that we're now in a moment where we can see our operating costs growing at a rate that trails our top-line growth, which is exciting and should provide healthy operating leverage in the future. We'll talk more about that at Investor Day, I'm sure, on this call. And at the same time, we've now completed our Ashburn, Virginia data center. So, capital expenditures in the third quarter were down significantly from both last year and last quarter, and we now have enough capacity to handle even significant growth in traffic all of next year. So, substantially less capital expenditures in 2024 than you've seen over the last two years, which is a good setup for not just operating leverage, but also cash generation. Finally, as we mentioned in our shareholder letter this morning, beginning next year, in 2024, we intend to begin providing financial guidance. Typically when we report our annual results each February, we will provide guidance for the ensuing full year and for the first quarter of that year. For each ensuing quarter, we will provide forward guidance for the next quarter and update our annual guidance. This is pretty standard fare. Thus, on our Q4 earnings call next February, we will provide guidance for the full fiscal year of 2024 and for Q1 of 2024. In May of next year, we will provide guidance for Q2 of 2024 and update the guidance for the full year and so on. We will guide on revenue, bookings, net income, and margins. We believe bookings provide a timelier indication of trends and our operating results that are not necessarily reflected in our revenue because we recognize the majority of revenue over the estimated average lifetime of a paying user. The change in deferred revenue constitutes the vast majority of the reconciling differences from revenue to bookings. Since our first quarterly guidance will be for Q1 of 2024, we expect a question today about our views on consensus numbers for Q4 2023, the last quarter for which we will not provide guidance. Since we haven't provided any guidance information, we just want to reflect that based on facts that as of November the 7th, the mean consensus for Q4 2023 is as follows: bookings of $1.065 billion; adjusted EBITDA of $173.2 million, which correlates to our calculation of covenant adjusted EBITDA; and revenue of $809.3 million. While we are not going to provide formal guidance for Q4, we are comfortable with the consensus estimates for bookings and adjusted EBITDA. Concerning consensus revenue, we want to remind everyone that revenue is much more complicated to forecast and model than our bookings. Paying users can buy both consumable and durable virtual goods. Bookings related to consumable virtual goods are recognized essentially immediately, while bookings related to durable virtual goods are recognized over the average life of a paying user, which is currently 28 months. The split between consumable virtual goods and durable virtual goods changes every month. In addition, the average life of a paying user can also change in any given quarter. Finally, because of the deferral period, in any given quarter, the revenue recognized has much more to do with prior bookings than with current bookings. That's for example, the growth in bookings over the past quarter will largely be reflected in our future revenues. And just as an example, I went back and looked at our bookings in the supplemental materials. If you think about the 28-month average life of a payer, that's about nine to ten quarters. So if you look at the growth rate of bookings over the last nine to ten quarters, you'll see that those growth rates are below the consensus revenue estimate, which is at about 40%. So we expect revenue in Q4, when we do the work on virtual versus consumable and the average life of a payer, assuming there's no change to that average life in Q4. We expect revenue in Q4 to be approximately $740 million to $750 million, or a year-over-year growth rate of approximately 28%. So with that, we're done with our opening remarks and we welcome questions.

Operator, Operator

Your first question comes from the line of Jason Tilshin from Canaccord Genuity. Please go ahead.

Jason Tilshin, Analyst

Great. Good morning and congrats on the strong results. I was just wondering, exchange fees as a percent of bookings were down sequentially. I'm curious if there's anything one-time that drove that? And just higher level, how you view continuing to reinvest in the developer community as you see leverage in other areas? Thanks.

David Baszucki, CEO

Hi, Jason. We absolutely... top priority is to continue to invest in the developer community. In fact, the strong results that you've seen over the last few quarters are a direct result of an explosion of creativity, new content, existing content being updated and upgraded, appealing more to our user base. So the top priority is to continue to invest in our developer community. The sequential decline is primarily related to an issue with our prepaid cards. There was an ability, and we can go through this in more detail if you want to get on a call with us one-on-one, to actually buy Roblox at a discount through prepaid cards and certain currencies. As a result, the bookings number and the DevEx number was artificially inflated versus the bookings number. The user was getting extra Roblox per dollar. We've now closed that, and they are now buying Roblox at the right price. That means they get slightly fewer Roblox, which means the DevEx related to those bookings is slightly lower. But going forward, that loophole effectively is closed, and we will continue to drive lots of opportunities for developers to grow the overall dollars in the system and the percentage of the economics that they get. And we'll talk more about that at Investor Day. I'm happy to discuss it on this call as well.

Michael Guthrie, CFO

Yeah, and we highlighted at our Developer Conference the growth rate of the top 10, the top 100, and the top 1000 developers, and those all continue to grow quite rapidly in terms of their revenue.

Jason Tilshin, Analyst

Great, it's really helpful. And just one quick follow-up. In the shareholder letter, you called out bookings growth really strong in Western Europe and East Asia. Just curious if there was any underlying drivers of that performance that stood out in the quarter? Thank you.

David Baszucki, CEO

Across Western Europe and East Asia, we have a few benefits that are really pushing the bookings growth rate. Number one, we have payer cohorts that are getting more and more senior in terms of tenure. We know over time as payer cohorts are on the platform for longer periods, they tend to monetize better. A lot of those payer cohorts are really hitting their stride in terms of maturity. Those are wealthy countries, with a lot of purchasing power. So, we've done very well there. We've seen lots of new content that has emerged in those markets. We're really growing across all ages in Western Europe and East Asia, from the youngest users on the platform to aged-up users.

Michael Guthrie, CFO

I want to highlight also core technology, less on the monetization side and more on the user engagement side is also underlying some of this. The quality of our platform in Japan has increased rapidly over the last few years. We highlighted semantic search and some of the other things we've been doing there. This is also the result of product quality and the quality of our automatic translation system.

Operator, Operator

Your next question comes from the line of Bernard McTernan from Needham & Company. Please go ahead.

Bernard McTernan, Analyst

Great. Thanks for taking questions. Maybe just to follow up on the last one, you guys have been talking about Japan for a couple of quarters now. Are there other wealthy under-penetrated countries out there that are next on the list to target?

Michael Guthrie, CFO

Well, Germany, Spain, Italy, all throughout Western Europe, France, they're all growing very dramatically. As you know, Bernie, it's less about an immediate target and more about organic growth that's driven, as Dave said, by great product technology, the fact that translation and search are better, and that there's a local developer community blossoming in those marketplaces. So it's organic and we believe very sustainable because it's organic. We're targeting users around the globe, including more and more users in the US, Canada, and markets that we're already very strong in. The countries in Western Europe and East Asia just are showing particularly strong growth and very healthy monetization.

David Baszucki, CEO

And when we talk about product quality in Japan, that's platform-wide product quality, not Japan-only product quality. That goes all the way down to raw product performance on low-end devices, for example, which can help accelerate countries like India. Search can help accelerate all countries. So really, we target the platform as a whole generally.

Bernard McTernan, Analyst

Understood. And then just on the cost-saving initiatives and talking about internal efficiencies, especially in infrastructure, obviously, you guys are doing a great job pushing on that. It feels like just from the shareholder letter, the commentary that there might be maybe more to do, you're discovering that there's more to do. Is that the right read, especially in infrastructure, just we see internal efficiency initiatives? It sounds like it might be a broader push than just growing it below bookings, but just want to double-click on it.

Michael Guthrie, CFO

I want to highlight a couple of efficiencies that we actually achieve from a quest for quality as opposed to a quest for raw efficiency. More and more as our safety platform moves to AI, it's been driven by a quest for just increasing the quality of everything we do around safety and moderation. A byproduct of that is a lot of efficiency. I think on the infra side, as we get into a high level of resilience, that gives us a lot more room going forward to grow without a lot of capital expenditures. Some of these are less discoveries than a natural evolution.

David Baszucki, CEO

And may just add, Bernie, one last thing to that. The growth rate that we had to build through COVID was so significant that we made a decision to invest heavily and aggressively, and we're happy that we did. Obviously, the platform is now at scale; it is much larger and much more capable than it was before. But now we're sort of through that macro adjustment of hyper growth that happened at the beginning of the pandemic. It should be much more rational and predictable growth moving forward. That allows us to invest and be more efficient throughout the income statement and balance sheet.

Michael Guthrie, CFO

I want to highlight one other nuance on efficiency. This gets into what we're doing on voice safety and voice moderation. We're doing very sophisticated work to help with voice safety and civility, and we're doing this on our own infrastructure. Incredible efficiency comes from using the same infrastructure that we use for real-time 3D simulation of all of our players for inference for voice safety.

Bernard McTernan, Analyst

Understood, thank you both.

Operator, Operator

Your next question comes from the line of Omar Dessouky from Bank of America. Please go ahead.

Omar Dessouky, Analyst

Hey, guys. Thanks for taking the question. I actually wanted to double-click a little bit more on this infrastructure question, because the numbers are quite remarkable. So if I just look at your results, it looks like your hours in the third quarter, your total engagement hours were up 15%, but your infrastructure cost per hour was down 18%. So that's pretty strong, and your infrastructure costs came in well below my estimates. Are there any one-time events that caused this very high cost savings on that line? How should we think about your infrastructure costs per hour going forward? Would they be at a similar rate as they were in this quarter or will they kind of come back up to where they were in the second quarter? Then I have a follow-up.

David Baszucki, CEO

Omar, I actually feel the one-time event has happened in the past, which was on core data centers, a fair amount of capital expenditure to build out resiliency, and we're through that now. We have resiliency on core data centers and on edge data centers where we run simulation. Once again, we've got great efficiency there based on that capacity. So I don't think there's a forward event reel. I think we've done a lot of that in the past.

Michael Guthrie, CFO

Yeah, and then Omar, as it relates to your comment about hours growing at 15%, I want to make sure I understood that. I think hours grew at 20%, but just clarify.

Omar Dessouky, Analyst

I'm just talking about quarter-on-quarter, Mike. Quarter-on-quarter, your hours were up 15%. Yet, your cost per hour was down 18% quarter-on-quarter.

Michael Guthrie, CFO

Okay, understood. We're going to show some more data at Investor Day, but one of the factors is what Dave just talked about, which was investment in building a lot of capacity, not unlike building a factory or anything else, and now absorbing that capacity. The second one is challenging the team to focus on a cost to serve target that declines over time and to get more efficient as an engineering organization. They've done an incredible job and we believe have plenty in front of them; they’re going to continue to drive down this metric of cost per thousand hours served. We actually see continued leverage in the infrastructure line to answer your question, and that should be reflected in the future in lower numbers as a percentage of either bookings or revenue.

Omar Dessouky, Analyst

Okay, awesome. Okay, and then maybe just focusing on sort of your top line and your guidance. What was it that increased your confidence and your ability to guide accurately as compared to, let's say, three to six months ago?

David Baszucki, CEO

Well, I want to do a shout out to the whole financial modeling team. We've always had a fair amount of confidence in our ability to model the future. So this is less about confidence. Mike maybe can comment to the real world.

Michael Guthrie, CFO

First of all, you said the existing guidance; we haven't given any guidance yet. We're going to guide for the fourth quarter. I merely commented on Q4. A number of reasons, there's certainly demand. We talked to a lot of investors who would really like a deeper insight into our forecasting, and the best way to do that is through guidance. Having gone through such a big cycle of COVID and coming out of COVID and the vast investments that we've made, now with margins and operating leverage coming out the other side, it does become easier to have that conversation and show people our models going forward. So I think it will be a healthy dynamic for everybody.

David Baszucki, CEO

I want to emphasize the breadth and scope of our internal vision. We're developing a platform that connects people globally across various regions, countries, and age groups. We're adopting several economic models to support this, including virtual currency and advertising, with more to come. Additionally, we face challenges on the GAAP revenue side, particularly with deferred revenue, as Mike mentioned. Our ambitious vision leads us to believe that guidance can help manage this complexity.

Omar Dessouky, Analyst

Awesome. Thank you, guys.

Michael Guthrie, CFO

Thanks, Omar.

Operator, Operator

Your next question comes from the line of Clark Lampen from BTIG. Please go ahead.

Clark Lampen, Analyst

Thanks. Good morning. I have a question on average spending rates. You guys highlighted a number of products throughout the prepared remarks that seem either in the late stages of pre-release or early release right now that seem likely to be accretive to spending. Are we at a point now where maybe those products collectively can offset some of the mix shift headwinds to monetization we see from international expansion and maybe average spending from here sort of lifts going forward? That's question one.

Michael Guthrie, CFO

Hey, Clark. Good to talk to you. First thing I would like to highlight is that in Q3 2023, the average payer monetized at $19.02 over the quarter, which was up from $18.11 in the prior Q3. So, monetization on a payer basis has been creeping up over the last few quarters on a year-on-year basis and is basically catching up to those peak moments in the pandemic when monetization was incredibly high. Overall, if you look at it on a DAU basis, some of the discussion around the prepaid cards that I mentioned earlier has been a bit of a drag on it. So, I think we'll work through that as well. Yes, I do believe I'm strongly optimistic about monetization overall. In addition, as Dave just highlighted, the platform now has 70 million daily active users with a virtual economy that is very large and growing at a very healthy clip. It is set up, as we have always talked about, and goes back to when we went public, that we will grow the virtual economies or vibrant economies on top of our platform, including advertising and other things that we'll talk about at Investor Day. Those things will obviously also move monetization up materially. So we're pretty excited about that. So overall, as we look at monetization, whether per user or per payer, we like the trends that we're seeing right now.

Clark Lampen, Analyst

Makes sense. And I'll.

Michael Guthrie, CFO

There’s a little bit of a nuance about the geographic mix shift, which I think is what you are getting at. I just want to remind everybody that in the US and Canada, as an example, as users grow in terms of older demographics, they monetize better. There is a mixed shift going on even in our core. Even with a younger user base where monetization and bookings are growing more slowly, we've definitely seen a positive shift as older users who do spend more are growing. It is not necessarily the case that just because other markets are growing faster, it has to have a detrimental effect on the rate of bookings per user or per payer. Overall, bookings growth is what we focus on.

Clark Lampen, Analyst

Understood. You talked about economy changes. Also, it looked like there were some adjustments made to sort of packaging and the Roblox per unit of currency values earlier this quarter. Could you talk about maybe how those packages are going to sort of affect the user and developer community, if at all? And secondly, how could those changes impact the P&L moving forward? Thanks.

David Baszucki, CEO

Yeah, I just want to highlight, you may be seeing small experiments that we are constantly running on the economy. We don't have any big plans for a massive economy shift. Consider these nudges right now.

Operator, Operator

Thank you for your participation. You may now disconnect.