Earnings Labs

Roblox Corporation (RBLX)

Q2 2023 Earnings Call· Wed, Aug 9, 2023

$56.15

-2.36%

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Transcript

Operator

Operator

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. [Operator Instructions] Thank you. Stefanie Notaney, you may begin your conference.

Stefanie Notaney

Analyst

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 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.

David Baszucki

Analyst

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 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 head count expense. We expect to return to double-digit covenant adjusted EBITDA margins in Q4 and 2024 as a whole. Let's dive into the business. We're driving continuously to 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 towards 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 DAU's 25% year-on-year growth. Korea, 34%…

Operator

Operator

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

Andrew Crum

Analyst

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.

Michael Guthrie

Analyst

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

Andrew Crum

Analyst

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

David Baszucki

Analyst

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 do think it will interact with subscriptions on the platform and recurring revenue.

Andrew Crum

Analyst

Thanks, guys.

Operator

Operator

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

Eric Handler

Analyst

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

David Baszucki

Analyst

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 (ph). We think this is going to continue to grow and get bigger, but you can check it out on the site.

Eric Handler

Analyst

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

David Baszucki

Analyst

Yeah. This is really exciting. We've been a little gentle on the pricing right now. We're going to -- we expect at some point in the future to float the price. And 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, unlike an image ad unit. It’s literally moving real-time people on Roblox into one of our partners’ experience, and we will self-discover that in the free market as we float pricing.

Eric Handler

Analyst

Thank you very much.

Operator

Operator

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

Clark Lampen

Analyst

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. I think the consequence from a user side seems fairly obvious in terms of the overall experience improving. But as we think about the developer side, how does that increase sort of, in volume and velocity of content creation impact developers? Does it make it a more competitive ecosystem? And if it is, is there a need to, I guess, sort of offset that with potentially higher developer distribution rates over time.

David Baszucki

Analyst

We think that -- I mean, 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 all the way from using a virtual sewing machine and scissors to purely based text prompts. And ultimately, we'll enter an age on Roblox where anyone can make their avatar or clothing 100% through text prompts. So if I or you wanted to build a piece of clothing, we could describe it. We're going to see that 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. We're not going to claim when we will achieve this on West world, where there's a text braced interaction of 3D creation and we do think that's the product vision where developers will have all tools at their disposal. We'll see a greater diversity of experiences. We will see people who before didn't expect to be creators making immersive 3D experiences. And we'll see the ones that are created by developers become more rich and dynamic. We may ultimately even see experiences that are dynamically personalized for each individual player. So it's really early, but we think it's a really exciting frontier for 3D creation.

Clark Lampen

Analyst

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 with 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 I guess, at the very 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 and sort of improving, we talked about advertising already. Could you help us, I guess, think about ongoing rates of margin improvement with the business. You identified the sources, I guess, across OpEx, but maybe simplifying a lot of those things between COGS, ITS and R&D over time. Does that roughly speaking, translate to sort of 200 basis points to 300 basis points per year? Is it a little bit more or would you be willing to quantify at this point? Thanks.

Michael Guthrie

Analyst

That was a long question, but a good question. That's okay. We will see leverage against pretty much all of the cost areas over the next 12 months will, we think we'll see a little bit of leverage in cost of goods sold because we've slowed down hiring, leverage against our compensation expenses because infra, trust and safety, we slowed down a little bit there. We've already close the gap pretty meaningfully on both of those two. Just to give you a few numbers. In the first quarter, infra, trust and safety was growing at about 33% year-over-year, bookings were growing at 23%. And then just last quarter, infra, trust and safety is growing at 24% and bookings were at 22%. So you can already see there's a lot of leverage that we've already shown and obviously, well on the way to seeing leverage in Q3. Same thing with personnel, the head count costs were growing far in excess of bookings in Q1, much less in Q2, and we've already taken steps so that we'll see leverage in Q1 -- Ss we -- '24. So we really feel like all the cost areas there is opportunity for leverage while we continue to invest in growing the top line. It will really depend on both a combination of how the costs roll out and how fast our top line grows, obviously. But I don't really -- we're not giving guidance on what the year is going to end up. We're just saying Q4 is -- we're a seasonal business. Q4 is back into double-digits, and we should be able to run double digits for 2024 as a whole.

David Baszucki

Analyst

Yeah. And on the hire (ph), I just want to highlight. We continue to hire a lot of people. The year-on-year incremental head count compensation costs will go down slightly. We do expect bookings in Q1 2024, to be growing at a year-on-year rate higher than the head count compensation. And the final thing just to add, I said once again in my statement is, we do expect double-digit covenant adjusted EBITDA margins in Q4 in 2024 as a whole.

Operator

Operator

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

Brandon Ross

Analyst

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.

David Baszucki

Analyst

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.

Brandon Ross

Analyst

Okay. And then, Dave, it seems like in the past, you haven't shown all that 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 interactive in the future? And then, maybe if you could talk a little bit about technically 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.

David Baszucki

Analyst

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 there where people who haven't used VR before are used to certain Roblox experiences on their phone or their computer. And they put on a VR headset like, oh my gosh, this same experience is all around, I’m deeply immersed in it, and it's the same experience I'm used to. So we do believe it's a really immersive experience. Our strategy has always been that immersive 3D should be everywhere. We want the highest quality experience everywhere. We want a creator to make once and run everywhere. We've done a lot of work on performance and on human interaction, so the same experiences out of the box work on Meta Quest. A lot of that work of course, is the same work we would do on Apple vision, just as a lot of the work we've done on Xbox would be the same work for PlayStation. And we are really excited that some of the performance work we would do for Meta Quest reflects throughout our whole ecosystem. So we’re already pretty good at build once, run everywhere. And as you correctly note, there’s a lot of opportunity for both immersiveness on VR and more platforms.

Brandon Ross

Analyst

Thank you.

Operator

Operator

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

Matthew Cost

Analyst

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 2Q is down a little bit from 1Q. And 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, it would 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 the -- some of what's happening in the second half. What changed in 2Q and then what's going to change in the second half to kind of cause that ratio of DevEx payouts to go up? And then I have one follow-up. Thank you.

David Baszucki

Analyst

So hey, I want to go high level on this. And we believe over time, more and more ways creators earn money on our platform, traditional DevEx, engagement-based payouts, we have advertising coming and potentially subscriptions and other things. So 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 be faster and greater than cost of goods than infra and then head count. That leaves either cash generation or DevEx. And that puts us in this wonderful place to balance really 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 over to Mike for detail on this.

Michael Guthrie

Analyst

Yeah. And then just on the quarterly and timing, just look at '22 as the year, DevEx rates were 23, 22, 22, 20 in the fourth quarter, 24% in the first quarter. So the timing of prepaid cards doesn't in fact, affect the payout ratios back to 21% this quarter. That number, if you can consistently look over time, it's moving up and it's moving in the 22%, 23% range, again, 24% in the first quarter. So it's going to be in -- it's not entirely formulaic because you do have engagement-based payouts on top of the normal formulaic piece. And to Dave's point, other things that developers can also participate in over time. So the number will fluctuate 100 basis points, 200 basis points quarter-to-quarter sometimes. And overall, so it implies that we're going to, again, be a bigger business in the second half than we were in the first half, and it implies a good healthy payout ratio for our developers, which is, ultimately, we're always investing in the developers.

Matthew Cost

Analyst

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 head count and infrastructure perspective, are all the investments, if not in place, at least in the plan in order to create those AI models that you're going to need to go to the next generation of what the platform is going to be capable of? Or could we conceivably be in a position where as you try to build these tools, it requires maybe more investment and that's a worthwhile thing to do.

David Baszucki

Analyst

Yes. I want to highlight that right now, we have a lot of people working on AI internally already. So we have a fairly significant team and it's a fairly significant team considering, once again, the scale of what we're doing, we're running 70 different vertical training models right now. And we've built fairly significant tech on the trust and safety side. I don't want to comment on the future opportunity there. We're always open to things. But right now, we're still on track to have our bookings expense, beat our head count expense in Q1 of 2024. And we have a really great sophisticated AI team already in place.

Matthew Cost

Analyst

Great. Thank you.

Operator

Operator

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

Omar Dessouky

Analyst

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 saw a corresponding increase in the mix of subscriptions. And I have a follow-up question.

David Baszucki

Analyst

Yeah. I'll tell you, right now, limited UGC is the long-term vision. Right now, it's a smaller proportion of our marketplace. But -- you could -- one could say that UGC Limit is more accurately near the economics of the real world as far as scarcity as far as cost of goods sold as far as creating really a rich and vibrant economy. And we do expect ultimately for every cohort, every type of asset to follow this pattern of more similarly mirroring the real world. The pricing on UGC items is 3x, the non-UC or non-limited pricing, which is a really, really good sign. And it's a good sign that we're moving in the direction of strong economic theory supporting how we build a virtual goods marketplace. We'll be rolling out expansions of this over the next two quarters and ultimately, it's our long-term direction.

Omar Dessouky

Analyst

Any comment on the effect on Prima subscriptions, because for my understanding, you have to have a premium subscription in order to participate in the trading.

David Baszucki

Analyst

Yeah. I believe we may be referring to be a creator, and we're using that most likely more as validation of user account. We'll have to check on that. I want to validate that. But we're not requiring subscription necessarily, I think, to buy UGC Limited, and we'll check with the team on that.

Omar Dessouky

Analyst

Understood.

David Baszucki

Analyst

We're not trying to -- Yeah. Just I want to clarify, we are not trying to drive subscriptions with UGC Limited.

Omar Dessouky

Analyst

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

David Baszucki

Analyst

Hard to say. We are doing experiments once again through every cohorts, trying to optimize mirroring of real life. All of the projections we talk about as far as bookings versus expense in Q1 really head count acceleration or not acceleration, but really bookings beating head count expense. I don’t believe we have huge gains from this built in. I believe we have a lot of upside there.

Omar Dessouky

Analyst

Thanks a lot, David. I appreciate it.

David Baszucki

Analyst

Yeah. Thanks.

Operator

Operator

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

David Karnovsky

Analyst

Hi. Thanks. Dave, I was wondering if you could discuss for -- and I know it's early for games that have added advertising units, how that's impacted the overall experience. Is it purely additive in terms of monetization? How does it impact engagement? And then your shareholder letter noted giving measurement and attribution tools to brands, I wanted to see if you could unpack that a bit. How much targeting you think you can provide for marketing purposes?

David Baszucki

Analyst

Yeah. Two things to unpack. One is, developers have a lot of analytics right now on our platform and they're opting in to these ad units once again to the tune of 19% of the top 100. We're optimistic that these types of ad units are native, immersive non-blocking and additive. We're not talking things that prevent you from playing or pre-roll or things that get in your way. We're talking about ad units that somewhat simulate the real world. We're walking around. We can see a portal to go to one of our brand experiences. And then people have a back button and they can come right back. So we're really optimistic about this. I would say, can you just highlight once again the second part of your question.

David Karnovsky

Analyst

Yes. It was just about in the shareholder letter, you talked about giving measurement and attribution tools to brands. Just wanted to see if you could discuss that, what level of targeting you willing to go.

David Baszucki

Analyst

We're building a full ad marketplace for this new type of ad unit. Brands will have within the constraints, of course, of safety and stability on our platform and PII rules and Copa rules and all of those types of things as well as our own vision. The ability to, I think, thoughtfully do some targeting. We're not going to be doing this for user teams on the platform. This is all for 13 and up. And we are already seeing signs in certain areas, for example, 17 through 24 female of strong demand potentially being greater than supply for these ad units.

David Karnovsky

Analyst

Thank you.

Operator

Operator

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

Matthew Thornton

Analyst

Hey. Good morning, David and Mike. Two, if I could, one on AI, and one on ads. On AI, I don't know if this is for Mike or not. I think you guys have got thousands of trust and safety head count on the platform at current. I think that's an area where you could certainly point AI to drive efficiencies. I'm curious, if you have any color or thoughts on timing of attacking that and what that impact might look like from a margin lift perspective? And then just second, on ads. As we think about the back half here, it sounds like we're going to get a lot more color here at the Investor Day in November, which is great. But as we think about the back half of the year and into next year, how should we think about, number one, just the biggest friction point that you see that you still need to unlock to kind of grease the wheel for acceleration there or said differently, maybe milestones we should look for in that ad business? And then a follow-up to your prior commentary on ads. I'd be interested to hear what developers are opting for in terms of ads, portal versus billboard, if you have any kind of split there would be great. Thanks, guys.

David Baszucki

Analyst

Okay. Yeah. So two things. One is, we'll give you a little hint here that we've indicated our year-on-year bookings growth is going to be faster than our infra cost in Q3 of this year. Infra includes all of our infrastructure hardware. It also includes cost for trust and safety. And we'll also say that all of our asset review pipelines are moving more and more to higher quality and lower cost with AI acceleration, all five of those pipelines, I mentioned. On the advertising thing, the thing to watch for us will be -- and we're not going to give a date when we fully float the advertising market, and so you can see true pricing out there, we're excited about it because we're seeing supply/demand really being interesting in some cohorts. As far as portals of the 19% of the units that we've placed, I believe most of them, I think, 12% or 13%. I'm looking it's about – that’s 12%. Great. So 12 of the top 100, I’m grabbing the data, Yes, cool. So 12 of the top 100 are placing portal ads. Do I have the right data there? Thanks. And then I'll kick it over to Mike.

Michael Guthrie

Analyst

Yeah. Thanks. Matt, on friction, again, maybe just I'll keep it high level for a second. Ultimately, in my mind, it's the total volume of brands that get engaged on the platform. So brands today, agencies, working with agencies and working with us, how many of those brands are building and engaging on the platform. We know that there's over 200 brands that have engaged with us at this point, that's double over last year. And that rate of growth and that rate of adoption is really what makes the platform a rich and open opportunity for advertisers. So that's the number I track almost more than anything. I don't think it's technology. I think it's the volume of brands and agencies that are working with us and getting their content onto the platform. So that's really what I look at.

David Baszucki

Analyst

Yeah. And then one final thing. To unlock when I say -- when we say float pricing, the complementary unlock there is everything we're doing is completely self-serve. We're not building a handholding platform. We are building a platform where any brand on their own can come and start using our platform for portal and image ad.

Matthew Thornton

Analyst

Appreciate the color.

Operator

Operator

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.

Unidentified Participant

Analyst

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

David Baszucki

Analyst

I don't think we've mentioned any detail around that. Can you more color on that? [Multiple Speakers]

Michael Guthrie

Analyst

We've addressed premium payouts on the call the comment?

David Baszucki

Analyst

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

Unidentified Participant

Analyst

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

David Baszucki

Analyst

Yeah. I'll chime in. I believe we pretty much normalize everything to the U.S. dollar in all of our payouts and do that in real time as we pay out.

Unidentified Participant

Analyst

Okay. Great. thank you.

Stefanie Notaney

Analyst

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

Operator

Operator

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