Roblox: Key indicators fall short, raising doubts about growth again

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$Roblox(RBLX.US) Roblox released its first-quarter financial results for the 2024 fiscal year before the US stock market on May 9:

The first-quarter performance was passable, with Bookings slightly missing expectations, but the profit side was relatively strong (Q1 Adj. EBITDA seemed lower than expected, but in fact, the company changed the adjustment process, and after Dolphin Jun's restoration, it actually exceeded expectations). However, the guidance was disappointing, missing expectations for Bookings and Covenant Adj. EBITDA guidance for the second quarter, while also lowering the full-year Bookings guidance.

Dolphin Jun speculates that in addition to some headwinds in the gaming industry itself and the high base from last year, some changes made by the company in the first quarter may have disrupted short-term user demand. In February, the company implemented dynamic pricing for virtual goods, overall raising the prices of popular items. Additionally, in Q1, when opening up developer application permissions on the Marketplace, the company set a prepayment threshold for developers. When virtual goods developers release products, in addition to the previous upload fees, they also need to pay a refundable prepayment (to be returned in installments during subsequent sales). The purpose of setting the threshold is to encourage developers to create high-quality content that can be continuously recognized and purchased by players. It is recommended to pay attention to the detailed explanation of the management's guidance adjustment in the conference call.

Management revealed that key metrics such as DAU, Bookings, and user engagement have shown signs of improvement since the second half of April, with Bookings already reaching a level of 20% year-on-year growth in early May (at the Investor Day in November last year, the company emphasized maintaining a 20% growth rate in Bookings from 2025 to 2027). However, the guidance revision has deepened market doubts about the sustainability of growth in the short term.

Looking at the market, the market capitalization, which has dropped by over 20%, is now approaching Dolphin Jun's previous conservative valuation of $17.5 billion. Considering the company's guidance on revenue and profit, the performance in 2025 is expected to exceed Dolphin Jun's adjusted conservative expectations (video ads are only targeted at users aged 13 and above). Despite the impact on Bookings, the upcoming launch of video ads in the second half of the year (currently in testing) and broader brand advertising partnerships are expected to directly increase revenue. Coupled with the company's continued cost reduction and efficiency improvement (as outlined at the Investor Day in November, EBITDA optimization is expected to improve by 100-300bps annually over the next 3-5 years), if there is further downside, it may present an opportunity for short-term accumulation.

Performance Metrics Overview Financial Report Detailed Analysis

I. Where the Thunder Strikes: Downward Adjustment of Core Indicator Bookings Guidance

For a business model like Roblox, which relies heavily on developer revenue sharing expenses accounting for a large proportion (25%) of operating expenses and has a subscription revenue front-loading feature, in a normal operating cycle, it is important to focus on Bookings. At most, take a look at future short-term trends based on deferred revenue.

In the first quarter, Bookings increased by 19% year-on-year, dropping seasonally to 924 million, slightly below the market's expectation of 927 million. Apart from the high base itself and the industry headwinds, the slight impact of bland content on user engagement growth, the price increase on some popular items by the company in the first quarter may have also affected players' purchasing willingness.

Looking at deferred revenue, the net increase in the first quarter only slightly grew year-on-year, significantly lower than the growth rate in the previous quarter, which also indirectly indicates that the revenue support in the second quarter is weaker.

The real thunder appears in the guidance. The company's guidance for Q2 (8.7-9 billion) is lower than expected (9.36 billion), and it has also lowered the full-year Bookings guidance from the original 41.4-42.8 billion to 40-41 billion, with an adjustment range of about 4-5%. As a result, the full-year Bookings growth rate is expected to be between 11%-15%, significantly lower than the company's original three-year CAGR expectation of 20%.

However, for income indicators that the market pays less attention to, there has actually been an upward adjustment. We believe that the company should have more confidence in advertising revenue, which is why while the growth rate of Bookings has significantly slowed down, the revenue growth rate has expanded.

On May 1st, the company announced that it will soon launch video ads targeting users over 13 years old, a user group with 45 million DAU and an average daily duration of 2.5 hours. At the same time, the company is expanding its brand marketing partnership scope, with the main announcement in the first quarter being a collaboration with Walmart. In the future, the Roblox platform will feature four types of ads in two categories: brand and video ads Brand Advertising - Portal, Image (Fixed Position)

Video Advertising - Automatically playing video ads (CPM pricing), Click-to-play ads (CTV pricing)

Currently, the market's expectations for next year's advertising revenue are approximately around 5-10 billion (the company's expectation for stable advertising revenue contribution is 1 billion/year), with more optimistic institutions projecting a long-term expectation (by 2027) of reaching 1.5 billion/year.

Compared to other social platforms, Roblox's disadvantage lies in its relatively low user base. Potential advantages may include a very high average daily usage time. However, it is important to differentiate between users immersed in games and those strolling in the plaza who have the opportunity to be exposed to ads. Combining with Dolphin's previous calculations, although the market's expectations for advertising revenue are positive, they are not particularly exaggerated. Achieving a commercial scale based on Roblox's advertising conversion rate compared to peers requires certain adjustments.

Reduce Capital Expenditure, Continue Loss Reduction and Optimization

In the first quarter, Roblox's GAAP operating losses showed a significant contraction compared to the previous quarter, mainly due to a substantial reduction in Capex, lower infrastructure costs, and strict control of operating expenses. In addition, advertising further contributed to total revenue.

However, most expenses are still closely tied to revenue. As Dolphin mentioned in "Roblox: Can't Swallow the 'Big Cake' of the Metaverse," the way Roblox recognizes revenue and cost expenses is crucial. Therefore, looking at the changes in the "Expense/Bookings" ratio provides a more realistic view of the operational situation.

By comparing operating profit to Bookings revenue, the ratio of expenses related to product development, customer acquisition, costs, and other expenses all decreased year-on-year, aligning with the optimization trend. The optimization of infrastructure costs saw the most significant improvement, decreasing by 3 percentage points year-on-year. Considering Roblox has been consistently reducing Capex over the past few quarters, with a drastic year-on-year reduction in Q1, it indicates that there is room for further adjustment in infrastructure costs.

After a slight increase in advertising revenue, the "Expense/Revenue" ratio showed a more pronounced decrease.

Note: The content includes images that are not transcribed. In addition, more than half of the employee expenses are non-cash payments in the form of equity incentives, so it will appear more friendly in terms of both Adj. EBITDA and cash flow metrics. Since the second quarter of last year, the overall number of employees has increased (from 2300 to 2500), leading to a 30% year-on-year increase in SBC expenses for 1Q24. However, it did not have much impact on cash flow in the end, with free cash flow doubling year-on-year to 191 million in the first quarter.

Similarly, the adjusted EBITDA metric, excluding SBC expenses, also saw a 65% year-on-year growth in the first quarter based on the original calculation method, with a profit margin of 9.5%, an increase of nearly 250bps year-on-year, in line with the optimization pace set by management during the investor day (100bps to 300bps per year).

III. Holiday season focus on customer acquisition, surge in marketing expenses

Roblox's user ecosystem steadily expanded, with the first quarter coinciding with the Christmas holiday, a peak season for customer acquisition. Roblox saw a net increase of 6.2 million users in the first quarter, with more users aged 13 and above, reaching 44.9 million. As video ads in the second half of the year are only shown to users aged 13 and above, the expansion trend of this user group is still quite important and needs to be continuously monitored.

It is worth mentioning that although there were 6.2 million new users in the current period, compared to 7.3 million in 1Q23, more marketing expenses were incurred (a 32% year-on-year increase). Apart from some headwinds in the gaming industry due to subdued supply, the current user growth may also be facing some pressure (third-party platform data is also relatively flat), suggesting continued tracking of growth trends.

Looking at it regionally, user growth in the first quarter was more balanced compared to the past few quarters, with a marginal rebound in the Asia-Pacific region. Before the emergence of new content that crosses user circles, North America is already a mature market, barely maintaining annual net growth. However, growth in the European market has also slowed down, indicating that Roblox needs to attract high-quality content developers to break through The user content has been translated from Chinese to English: In-depth