Earnings Labs

Roblox Corporation (RBLX)

Q2 2024 Earnings Call· Thu, Aug 1, 2024

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Transcript

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. [Operator Instructions] 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

Analyst

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

Analyst

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…

Mike Guthrie

Analyst

Okay. Thanks, Dave. Appreciate it. I want to just reiterate, I've also really enjoyed the last six and a half years, look forward to finding a great financial leader for the company and helping that person transition. And I feel as the Head of Finance, I like the financial position that the company is in. I feel good about where we are in terms of growth and return to cash flow. Margins are expanding and the balance sheet is in just pristine condition. So it's been an amazing period of time and really good fortune to have been at the company during so much growth. I do want to reiterate a lot of comments that Dave made regarding the quarter and the condition of the business and where we're going to be able to take it. And as that relates to our guidance in the in the full year. Bookings, as he mentioned, grew at 22%. We know that at our Investor Day last November, we talked about maintaining 20% plus growth, we were a little bit below that number in the first quarter. And even with a little bit of a challenging April, we produced 22% growth for the quarter. So the exit rates were very healthy and have been as we transition into Q3. Operating leverage is really kind of the highlight, I think, for this quarter. And after you look at the top line, it's really about the leverage. We've talked about getting our fixed costs down and getting leverage on our fixed costs. That really falls into two buckets. Infrastructure, trust and safety. The metric that we look at and you can calculate looking at our supplemental materials, which are now on the IR website, is cost to serve per thousand hours. That's our KPI. That's…

Operator

Operator

Thank you. [Operator Instructions] 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

Analyst

Yes, the major changes that we had started to implement this time three months ago when we did the call. We have started to see the level of improvement happening in the back half of April and the beginning of March. And we were cautiously optimistic and reflected in our guidance, lower guidance at the time that we didn't have enough data to project that forward. What we have seen since that call has been actually an acceleration of those trends, very powerful improvements in user growth and especially in engagement and then subsequently in our bookings growth as well. So given the -- again, the sort of the exit rate of growth of bookings in the second quarter and what we've seen at the beginning of the third quarter, we felt comfortable bringing the full year guidance back up. On top of that, continue to see the kind of operating leverage that we expected to see, which reflects why we've increased basically all the below the line metrics all the way down to free cash flow. So that's a -- simple answer is that, what we saw working three months ago is continuing to work very, very well and actually is accelerated in terms of its impact. And we feel like the health of the platform has really just 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

Analyst

Yes, great question. I'll start with a metaphor, which was a while back, Roblox came forward as the first sponsor of the California Age Appropriate Design Code. We're always behind legislation that helps support privacy and safety of people around the world. In the case of the California Age Appropriate Design Code, we happen to be already implementing much of what was in that code and supported it. So we're -- we continue to monitor legislation. We're very supportive of legislation that helps ensure safety and privacy. It's been the foundation of our company ever since we started. Thanks, good question.

Operator

Operator

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

Bernie McTernan

Analyst

Great. Thanks for taking the question. Maybe to stick on the point of guidance. Mike, just given the commentary of the strong exit rate of 2Q and strong start to 3Q, just surprising the decel maybe that's being guided to for 3Q and 4Q, so just not sure if you're going to go into more detail there. I know there's -- the shareholder letter called out conservatism. And then maybe for Dave, just talking about new genres in the shareholder letter, like action, sports, racing, what does it take to stand up a new category like this? And how does the process work to communicate to developers and additional tools that you need to provide them?

Mike Guthrie

Analyst

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

Analyst

Hey, on the gaming front, and we touched on it, but we'll go into just a little more, arguably wherever you get your data, the gaming space is north of $160 billion market. And so, when we look at our bookings guidance for the year of maybe [4.2%] (ph), we're right now at just 2.5% of that. What we talked about regarding genres is there are some genres -- there's many genres where our creator community is super strong with properties in the ones and fives and north of 10 million daily active users and that includes roleplay, battle, platformers, horror experiences. What we shared with the creator is, the platform we have and the infra, the game engine, the tooling. We believe to support a wide range of genres in gaming. We did a research study to highlight genres that we just thought were underutilized right now. This is less about our tooling and more just making our creator community aware. And we're seeing really good early signal in open world action, sports, racing, social cooperation type platforms. We just think there's headroom there in some genres that our creators are now starting to take advantage of.

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

Analyst

Yes, I'll share a couple really additional pieces of color. There are -- there's three main areas we have been working on and implementing. The first is very simple traffic type ad units on our own platform. You can see those on our homepage right now. They say sponsored. We've increased that. We've seen a uptick of our own creator community and when I mentioned FIFA for example, they actually took advantage of that to help launch and boost their property. So there's a large opportunity for even the creators on our platform. We launched video now for brand and we're seeing subsequent quarter-on-quarter growth of that unit as well. And finally, long-term, we are also supporting portals that bring traffic to experiences. And more and more with the stuff we've implemented like IAS integration and real world shopping, we're going to more and more give our brands the ability to close the loop on that and really measure more and more accurately the benefit of those units. So continue to make great progress. I think Mike wants to add a little.

Mike Guthrie

Analyst

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.

Cory Carpenter

Analyst

Thank you both.

Operator

Operator

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

Aaron Lee

Analyst

[Technical Difficulty] my question. So I wanted to touch on the LiveOps events. As you run more of these types of events, have there been any takeaways or learnings that you can apply to the pipeline of events you have planned and is there anything you can share about what you saw during the [indiscernible] event just in terms of engagement? I think that would be helpful. Thanks.

David Baszucki

Analyst

I want to highlight a unique real opportunity on Roblox. And part of the engine of these LiveOps events is that, we're a UGC platform. And some of our events are including 50 or more experiences, all of whom are participating in the event, adding event features, whether it was the hunt, the classic or now the games, which is more focused on the sporting genre and the competition genre. So here's what we see from those events. They do drive DAUs. They do drive reclamation. The classic, for example, brought a lot of the Roblox community that has played on Roblox throughout the years back to the platform, just with some of the classic memes on that thing. They also have some other benefits as well. In addition to what I've shared with our AI-driven discovery algorithms and curation and sponsored, they do increase visibility on a wide range of properties on the platform as well, driving content discovery and diversity. So it's a net plus, plus. We're in a unique position to support these types of events with incredible diversity. Once again, the games is a great example of that. There's over 20 experiences that are all sports-based experiences that support kind of the -- we're in a sports two weeks period here and the games is kind of reflecting that with properties on the platform.

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

Analyst

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

Analyst

Thank you.

Mike Guthrie

Analyst

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

Analyst

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 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 as 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, well 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

Analyst

And Matt, on your question on margins, your math is correct. It's really a combination of two things, which is -- well, I'm sorry, three things. Very much in line with what we said last November. I do feel like we were pretty accurate in describing what we expected to have happen. The first is the top line growth, which obviously helps us absorb fixed costs. And there's nothing like top line growth to help your margins along. The second one is, back to those fixed costs as we talked about on the call and highlighted in the letter. We've seen significant leverage in those areas. It's been just an incredible job on our infra and safety teams of focusing on a KPI of costs to serve for a thousand hours and constantly looking for ways to improve that, while increasing the quality and safety and civility of everything on our platform. And I think the team's just done an amazing job. This is probably one of the best examples of using artificial intelligence and all of the compute and logic power behind that to make something in our cost structure better and more efficient and safer, but also driving the cost down. And so, that cost to serve number, which is down about 25% year-over-year, is really one of the big drivers. That's about 400 basis points of margin improvement right there. The second one is on people. And a really good metric to always look at for us is revenue per person and for any company. We've generally had very high revenue per person at Roblox. And over the last year, that number's moved back up to $1.6 million. That's another 20% improvement over where it was a year ago. And as a result, that drove about 500…

David Baszucki

Analyst

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 infra, 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

Analyst

Yeah, I would use the -- maybe so the word content staleness. I would use the term non-optimal ecosystem health based on how we surface content. And I highlighted, I'll touch base on the algorithm, but also highlighted that we've increased the diversity of the content that's bubbling up with our today's picks, which is really intelligent curation. That's expanding into several cohorts as well. We've seen creators take advantage of our sponsored tiles. On the core algorithm, we're getting more and more transparent with that algorithm. We're starting to share more with the community, how we kind of rate and support various terms. We have seen as a result of all of this, as I mentioned, more properties in the last three months bubble up quickly. I mentioned Dress to Impress, for example, which has doubled in the last quarter. And internally, we do measure diversity of content. We measure the spread of that, and we have some internal indices that we've seen improve 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 [indiscernible] versus what the Q3 booking guidance is. Is that purely just driven by last year [indiscernible] 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

Analyst

Hi, Arthur. It's A, the highest growth quarter of the year last year. So you're -- we're just comparing against the highest growth of 2023. And B, as you rightly point out, it was when PlayStation launched. And so that was a good healthy bump to growth last year. And so, we'll have to lap that in Q1 -- sorry, 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 [indiscernible] tools? Thank you.

David Baszucki

Analyst

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

Analyst

And finally -- I just want to do one other comment. Safety is an example of running massive amounts of inference on our own hardware to keep costs very low. And it's one of the benefits of having built our own intro with many edge data centers, lots of bandwidth around the world, is the ability to run this quantity of the inference at low cost.

Clark Lampen

Analyst

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

Analyst

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 perf, raw 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

Analyst

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

Analyst

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.