Earnings Call Transcript - RBLX Q2 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Roblox Corporation Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised today's conference is being recorded. I'll now hand the conference over to Anna Yen, Head of Investor Relations. Please go ahead.

Anna Yen, Head of Investor Relations

Good morning, everyone. And thank you for joining our Q&A session to discuss Roblox's second quarter 2021 results. With me today is Roblox's CEO David Baszucki and CFO Mike Guthrie. Before we start, I want to remind everybody that yesterday after market closed, we published the earnings results and supplemental materials on our Investor Relations website. Since the letter provides a lot of details, we will make some brief opening remarks and reserve the rest of the time for your questions. For our webcast participants, please note the question icon at the bottom of your screen where you can type in your questions. We'll do our best to take as many as possible. On today's call, we may be making forward-looking statements including but not limited to statements about our future financial performance, growth rates in business and investment strategy and plan, development of new technologies, investment in and payments to developers, our ability to bring new brands, music, and recording artists to this platform, investments in international growth, the development of the members, the outcome of any litigation, and the success of and plans for recent acquisitions. Any statement that refers to expectations, projections, or other characterizations of future events including financial projections, future market conditions, or the impact of COVID on our business and on the economy as a whole, is a forward-looking statement and based on assumptions today. Actual results may differ materially from those expressed in these forward-looking statements and we make no obligations to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued yesterday as well as risks described in our filings with the SEC. We will also discuss the non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Finally, this call is being webcast and will be archived on our website shortly after. With that, I'll turn the call over to David.

David Baszucki, CEO

We'll start with Mike Guthrie and then I'll chime in later. Just before we hand it over to Mike, welcome everyone to our Q2 call. Reaching out to everyone out there and your families in the midst of a lingering COVID situation. We hope you are all doing well. It's been an amazing quarter for us. A year ago, we were in the midst of lockdown. It's the first quarter when we started to see a little light at the end of the tunnel. We're extremely proud and excited with our results. Mike is going to kick it off, and then I'll follow up with some comments.

Mike Guthrie, CFO

Thanks, Dave. Good morning, everyone. Yesterday we released our Q2 results along with key metrics for July, giving you insight into our performance as we enter the third quarter. To keep you informed, we will also share August metrics in the second week of September, which will provide an update for Q3. Additionally, we want to clarify the distinction between bookings and revenue, as it can be confusing. The best way to think about bookings is the value of Robux virtual currencies purchased in the quarter. Revenue accounts for deferred revenue stemming from those bookings. We typically recognize our bookings over a 23-month period, which is the average lifespan of a pair, and these figures can vary over time. We have noticed some confusion when comparing our revenue and bookings numbers. For this quarter, our adjusted Clarity bookings were $665.5 million, and GAAP revenue was $454.1 million, reflecting a year-over-year increase of about 127%, with bookings up by 35% year-over-year. If you are analyzing adjusted EBITDA or cash flow, please note there was a $52 million accrual this quarter for a litigation settlement with certain labels and publishers in the music industry, which we believe is a one-time occurrence. Overall, we concluded the second quarter strongly post-COVID and have continued to see growth, starting Q3 on a high note in July. I'm eager to discuss more, and now I will hand it back to Dave before we move into questions.

David Baszucki, CEO

Just a couple of highlights. Looking at our core user base, once again, very proud of our 29% DAU growth year-on-year, especially because we've been lopping that super lockdown quarter in Q2 a year ago. In Q2, we saw 46% 13 and up DAU growth year-on-year, which is a great bellwether for where we're going. Internationally, in Q2, part of our vision of really bringing the whole world together, we saw 42% DAU growth outside the U.S. and Canada, which we think is spectacular. We've also seen a broadening and acceleration of the diversity of content on our platform which has been very satisfying. Last year, 58% of the remarks were coming from the top 10 experiences; that number is now 37% in Q2 of this year. Looking forward to diving in with your questions.

Anna Yen, Head of Investor Relations

Great. Actually, I will turn it over to the Operator. Operator, you want to start taking questions?

Operator, Operator

Yes. Our first question comes from the line of Alexia Quadrani with JPMorgan.

David Karnovsky, Analyst

Hi. This is David Karnovsky for Alexia. I will start with the Guilded acquisition. Dave, can you maybe discuss how you plan to integrate their platform with Roblox? Do you see Roblox users on Guilded communities now? And if so, how do you see that impacting their overall experience? And then how do you plan to maintain support to the non-Roblox communities that are on Guilded? Thanks.

David Baszucki, CEO

Yes. This really goes to a bit of our vision here. When we speak about Roblox, we are an immersive 3D, metaverse platform company. Guilded falls within one of the complementary product categories. We see our people who play Roblox use various apps to hop from place to place and communicate outside of those apps. Even though we're simultaneously hard at work on immersive spatial audio for people who are in 3D, we believe that Guilded gives us the opportunity to experiment with how these types of product work together. More to come on that in future announcements.

David Karnovsky, Analyst

Okay. And then I was just hoping you could expand on your shareholder letter commentary on Roblox in China so far. What do we learn? How are users engaging with the experiences there relative to what you might have seen in other launch markets? And just as a follow-on, how do you evaluate the current or future regulatory risk in the market? Thank you.

David Baszucki, CEO

Yeah. A couple of things we've started to see are very encouraging. We've started to see amazing content coming out of China and it hitting the worldwide platform. Livetopia coming out of China is now one of the top 12 experiences on Roblox, which is amazing. We've also seen very great success with a lot of the U.S. global content going into China, which is also a bilateral network effect. We're really excited about the traction we've seen in China with respect to initial user growth. We have a very long-term view and we think there are amazing opportunities to adapt and benefit.

David Karnovsky, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Brian Nowak with Morgan Stanley.

Brian Nowak, Analyst

Thanks for taking my questions. I have two. The first one is: In the second quarter, it looks like U.S. and Europe, DAUs were down quarter-over-quarter. Can you talk about what you're seeing in July and August in the U.S. and Europe DAUs and sort of some of the drivers of that DAU decline? And then secondly, talk to us about the competition for developers, specifically the highest quality developers.

Mike Guthrie, CFO

Okay. Got it. First, on DAUs in the U.S. and Canada, year-over-year in Q2, they were up about 5%. I think you're referring to engagement which was down year-over-year. We have expected that during the second quarter, COVID would go away and we would return to a normal sign-up and retention conversion. That's very similar to what happened; by the end of the second quarter, June, there was a lot of reopening, and some of that has reflected in engagements. The overall growth in the quarter was driven by Asia-Pacific and the rest of the world.

David Baszucki, CEO

And then this is Dave chiming in on the take rate and just our vision going forward. For 15 years, we've been building this platform, and we've been supporting that with three major tenets. One is driving innovation. The second thing is, we've historically been a secure place for the last 15 years. And third, we're in a really unique position with the foundation of stability, safety, and learning. We're growing from there. In general, we much prefer money flowing to creators as part of the self-service UGC architecture, as opposed to hand-given grant-type programs. That number is going to keep going up.

Brian Nowak, Analyst

Got it. And just to clarify that, Mike. Is it U.S. and Europe DAUs up quarter-over-quarter, or is that more driven by the rest of the world?

Mike Guthrie, CFO

I'll double-check, Brian. I think it's driven by all regions.

Operator, Operator

Your next question comes from the line of Mike Ng with Goldman Sachs.

Mike Ng, Analyst

Hey. Good morning. Thanks so much for the question. You guys have made a ton of progress in diversifying your experiences and evolving your user base. I was just wondering if you could talk about a few of the drivers that have led to that and how that strengthens the durability of the business.

David Baszucki, CEO

Yeah, this is Dave. At our Investor Day, we will show our transparency with respect to our current shipping and future vision. We are right in the middle of innovation across every aspect of our platform. A lot of the visionary stuff we've put in place a few years ago is what's been driving our current position. The amount of white space in the 13 and under market in relation to our TAM is enormous because we have heavily depended on a very small segment of the consumer base from ages 9 to 12. We think early signs for ages 13 and up bode well for us.

Operator, Operator

Your next question will come from the line of Matthew Thornton with Truist Securities.

Anthony Duplisea, Analyst

Hey, this is Anthony Duplisea on for Matt. Thanks for taking the question, guys. Wanted to ask about content expansions outside of gaming experiences. Are there any companies in the pipeline for collaboration and expansion? And how and when could these expansions impact financials?

David Baszucki, CEO

Yeah. I love that you brought up online learning. We have a very big vision around education on the Roblox platform. We believe it's not just about gaming, but about immersive experiences that include various topics. We're looking forward to seeing how these experiences can grow with respect to their financial impact.

Mike Guthrie, CFO

In things like Gucci Garden, we're monetizing in very traditional ways, including the purchase of virtual goods. We're optimistic about future collaborations that would enhance those economic interactions.

Operator, Operator

Your next question comes from the line of Drew Crum with Stifel.

Drew Crum, Analyst

Mike, wonder if you could drill down a little bit further on the monetization of the up-style metric that you disclosed. Can you discuss some of the puts and takes on that metric?

Mike Guthrie, CFO

In Q2, we talked earlier about the broadening of content on Roblox. More experiences are part of the monetization engine, but some of those experiences are early on and may take time to fully monetize. There is a clear correlation between influencer-driven content and monetization success. We're optimistic about our ability to enhance and develop that further over time.

David Baszucki, CEO

And, hey, this is Dave, just following up on the brand partnerships. I'm excited about them and we track our organic growth. Our partnerships are great but we don’t need them to grow. Our growth comes fundamentally from users engaging with friends and being on the platform regularly.

Operator, Operator

Your next question comes from the line of Brandon Ross with LightShed Partners.

Brandon Ross, Analyst

One of the more interesting parts of earnings this quarter was when Zuck said that Facebook is now a metaverse Company. I wanted to get your perspective on how you think a broader metaverse will play out in the future.

David Baszucki, CEO

That's a thoughtful question. The technology to support a metaverse is extremely complex. Our focus for the last 15 years has been on innovation and shepherding a vision of the metaverse. We believe it must be a civil and safe platform. We focus on delivering innovation on our platform at a growth pace and with talent that will bring long-term value.

Brandon Ross, Analyst

Well, maybe just a follow-up on Guilded. I wanted to ask if you move from more text-based communication to integrating voice and video communications, how prepared are you for that intersection?

David Baszucki, CEO

We take it very seriously. Civility and safety are our top priority whether it comes to how we filter text or voice communications. We will come at it from the safe foundation we've always had and align with the vision of guiding communication within an immersive environment.

Operator, Operator

We'll now take questions from the webcast audience.

Anna Yen, Head of Investor Relations

The first one is from Richard J. Can we talk about the trends, particularly usage and spending trends, between the over-13 and under-13 audiences?

David Baszucki, CEO

They're incredibly similar, which is a positive point. When looking at engagement and monetization, whether under 13 or over 13, they're quite similar.

Anna Yen, Head of Investor Relations

And the follow-up to that was being curious if we're seeing partnerships with Gucci helping stimulate demand for Avatar personalization?

David Baszucki, CEO

The demand for Avatar personalization is incredibly strong across all ages, as players want to represent themselves effectively and authentically in the metaverse. Building a vibrant market for Avatar customization is super important to us.

Anna Yen, Head of Investor Relations

Great. We've got a lot of questions coming in about China, particularly, what is our response to the government's new regulations?

David Baszucki, CEO

Our focus is on education and creation, which has been very powerful in China. We will abide by the rules and regulations set forth by the government. We remain committed to a long-term vision there.

Anna Yen, Head of Investor Relations

Okay. Great. Can we provide color on the trajectory of expenses versus bookings growth over the next couple of years?

Mike Guthrie, CFO

We focus on hiring the best talent, and we aim to increase investment in the creator community on Roblox. We produce a lot of operating cash flow and have the ability to invest aggressively as we work towards a billion users.

David Baszucki, CEO

Kudos to our core platform and infrastructure teams for building a high-performance, low-cost, high-reliability network around the world.

Anna Yen, Head of Investor Relations

Okay. Can we talk about the investment strategy in more detail? Are we investing enough on the creator side?

David Baszucki, CEO

Our developer community is growing significantly, and we continue to enhance our platforms to support them. Engagement-based payouts are increasing, and we're focused on maximizing our self-service UGC architecture.

Mike Guthrie, CFO

We're very careful about where we invest and we focus on investments that will yield long-term benefits for our developers and platform. We're grateful for our flexibility to continue investing at high rates.

Anna Yen, Head of Investor Relations

And then I think two more. Quick one, fraudulent credit card usage accounting for 5% of bookings. How are we planning on tackling this internally?

Mike Guthrie, CFO

We have a dedicated team focused on fraud and our numbers have fluctuated a bit, but we're maintaining vigilance on minimizing fraud as much as possible.

Anna Yen, Head of Investor Relations

Okay. And then the last question is on the slow burn. Can we talk about the traction we're seeing with new developers and higher-quality content coming up?

David Baszucki, CEO

We've seen great traction with high-potential developers. Our platform attracts top talent and we're proud to see internal studios grow competitive with larger external studios.

Anna Yen, Head of Investor Relations

Great. I think that's all the time we have for today. I will now hand it back over to David.

David Baszucki, CEO

Wishing you, your friends, your families, the Roblox community, a hopeful and safe emergence from this COVID situation. Thank you for all your support.

Anna Yen, Head of Investor Relations

Great. Operator.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.