Roblox: Prioritizing User Experience, Sustaining Ecosystem Expansion (2Q23 Conference Call Minutes)

The following is a summary of the 2Q23 earnings conference call for Roblox.US. For a review of the earnings report, please refer to "Roblox: Profits Plunge, Piercing High Valuations".

I. Management Report

1. The growth rate of 24Q1 bookings will be faster than labor costs.

2. Adjusted EBITDA margins will return to double-digit levels in 23Q4 and remain so throughout 2024.

3. On the business front, we have been committed to achieving the goal of 1 billion daily active users, focusing on four areas: internationalization, all-age inclusivity, Roblox's daily functionality, and our ecosystem economy.

   (1) Key regions: Germany's DAU grew by 25%, South Korea by 34%, Brazil by 38%, and India by 40%. To support the user experience of Japanese users, we introduced Japanese language search functionality last quarter.

   (2) All-age inclusivity: Users aged 13 and above are five times more than users under 13, and DAU continues to grow by 33%. DAU and Hours for users aged 17-24 increased by 36% YoY. Users aged 17-24 and 25 and above have consistently higher growth rates in hourly bookings compared to other age groups.

   We believe that even in our core market of 9-12-year-old users, there is still room for penetration and growth.

   (3) Ecosystem economy: The top 10 revenue-generating developers have each accumulated an average of $27 million. The 1000th developer in the long tail earned a total of $64,000 in a year, doubling their earnings compared to the past three years.

   In the past 6 months, the percentage of developers using analytics tools among the top 10,000 revenue-generating developers has increased from 22% to 40%. We believe that developers who use analytics tools will have an improved development experience.

   (4) Functionality: Currently, 12% of users aged 13 and above have started using the voice feature. In Q2, there were 2 million DAU voice users, a 30% increase compared to the past six months. Our data shows that the more users immerse themselves in using the voice feature, the more it improves our key operational metrics and increases spending on the Roblox platform.

   Additionally, we have added facial animation functionality for all voice users, enhancing the realism of communication between users.

4. Collaboration with Meta Quest: Beta testing has been conducted, and in the first 5 days, there were 1 million downloads.

5. NARS Cosmetics, H&M, Spotify, NASCAR, and iHeartRadio are expected to generate advertising revenue this year. More details about advertising progress, especially the outlook for 2024, will be shared during the Investor Day in November.

6. AI: Currently, there are 70 machine learning training stacks with 1 billion automatic translation model parameters. The platform generates 5 billion hours of user interactions per month, which helps us enhance system quality. All our security systems, images, audio, speech, text, and 3D animations run on our own platform, ensuring cost efficiency and quality. In the long run, we will establish larger and more interesting 3D content generation models, as well as models for human simulation and NPCs, running on our own infrastructure with high performance and low cost.

II. Q&A

Q1: Will the developer revenue share accelerate in the second half of the year, while the growth rate of bookings slows down?

A: The revenue performance in the second half of the year will be better than the first half, so the developer revenue share will be higher. We expect to pay developers a total of $800 million in revenue share this year (including $350 million in Q1 and Q2 combined).

Q2: How to improve the VIP subscription stickiness for developers? How much revenue can Roblox take from it?

A: Currently, many developers are interested in subscribing to the VIP service, but we don't have a specific timeline for it yet.

Q3: What impact will content age ratings have on UK users?

A: We see a trend where more developers are starting to create content for users aged 17 and above.

Q4: How is advertising priced?

A: Currently, pricing is relatively conservative, but we expect it to fluctuate in the future. Immersive advertising offers a different form of experience compared to video and image ads. When this type of advertising starts to deliver real value, we will consider adjusting the prices.

Q5: What is the impact of AI on the developer ecosystem? Can it enhance the competitiveness of the Roblox platform's developer ecosystem? Can it offset some of the impact of increasing the developer revenue share?

A: Currently, developers are accustomed to using graphic tools and 3D models to create immersive 3D content. However, Roblox will eventually provide a feature that allows anyone to create their own avatars and clothing 100% through text prompts, and it will be created in real-time.

This will improve overall development quality and offer a more diverse experience. Just like what is depicted in "Westworld," although we don't know when we will achieve the 3D interactive creation supported by natural language text, it is our product vision.

Q6: Assuming there is advertising revenue next year, if the game product cycle does not recover as expected, does the company have any guidance on improving profit margins next year? 200 basis points or 300 basis points? A: We expect to see the leverage effect of all cost expenses in the next 12 months. Costs will be optimized a little bit because we are slowing down recruitment. SBC will also be optimized slightly, mainly in terms of infrastructure costs.

The slowdown in infrastructure costs can be seen by referring to the past two quarters. In Q1, infrastructure costs increased by 33% YoY, while bookings increased by 23%. In Q2, infrastructure costs increased by 24% YoY, while bookings increased by 22%.

Therefore, Q3 will continue to release leverage and improve margin. Although we have been investing to strengthen business growth, our cost expenditures can be optimized. However, we do not provide guidance on the specific speed of optimization, which depends on the growth of the business. Only the situation in Q4 (seasonal period) is mentioned, where the Adj.EBITDA margin will return to double digits, and the same will be true for the full year of 2024.

Q7: We are quite interested in the Beta testing with Meta Quest. Will we see updates on PlayStation or Switch in the future?

A: We believe that immersive 3D and human interactive experiences should be available on any platform, and we are certainly paying attention to these other platforms.

Q8: Do you consider VR to be an important platform for reaching Roblox? Has Apple's Vision Pro changed your perspective on 3D interactive experiences? How complex is it to create VR and AR content on a technical level?

A: Currently, we have 1 million downloads and installations on Meta Quest, and many users who have never experienced VR before are starting to try it out. The immersion is very good. We hope that developers can develop once and run on various platforms.

Q9: In Q2, the developer share of bookings accounted for 21%, slightly lower than Q1. But according to your forecast of $800 million in developer share for the full year, does this mean that the share of bookings for the second half of the year will increase by 2-3 percentage points? What is the reason for this?

A: We believe that over time, creators will have more ways to make money on our platform, such as traditional developer shares and engagement-based payments, and so on. By 24Q1, we expect our bookings growth rate to be higher than the growth rate of operating costs, infrastructure fees, employee expenses, and other costs. The remaining portion will either generate cash flow or be allocated to developer shares.

In 23Q1, the developer share accounted for 21%, and over time, this number mainly fluctuates within the range of 20%-23%. It cannot be fully formulaic because the share also depends on developer engagement. Since developers are also involved in other activities, this number fluctuates by 100-200 basis points each quarter. Q10: The shareholder letter mentioned the development of a multi-model generative AI model. Have the relevant developers and investments been put in place? What impact will it have on profits?

A: Currently, there are many people internally working on AI-related projects, running 70 vertical training models primarily for infrastructure improvement. As for the future opportunities related to this, I won't comment much. However, we still expect that the Q1 2024 Bookings growth rate will exceed the growth rate of employee expenses.

Q11: In April, you released UGC Limited. Can you provide an update? Have you seen any impact on subscriptions?

A: UGC Limited is a long-term vision. Currently, it has a relatively small share in our Marketplace, but UGC Limited is closer to the real-world economic system. UGC Limited is priced at three times the non-UGC or non-limited pricing, which is a very positive sign. In the last two quarters of this year, we will continue to promote it.

UGC Limited does not require a subscription in advance, and creator users can directly participate.

It is difficult to evaluate the monetization impact of UGC Limited for the next few quarters.

Q12: What is the impact of advertising on user experience? Does it affect user stickiness? The shareholder letter mentioned providing measurement and attribution tools for brand advertising. How much potential does this bring to the advertising business?

A: Firstly, our platform has a lot of analytical data, and developers will choose a higher proportion of native and immersive ad units, which will not have a significant negative impact on the user experience. People can enter through the entrance of brand experience at any time and exit through the return button. Currently, we see some signs that 17-24-year-old females have a higher acceptance of this type of advertising.

Q13: Regarding the maintenance of trust, security, and other related infrastructure, the company already has thousands of employees. Can AI be used to improve efficiency? What impact will it have on profit margins?

A: The growth rate of Q3 Bookings will be higher than the cost of facility security maintenance. Through AI acceleration, all our asset review processes will develop with higher quality and lower costs.

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